YOUR CLIENT IN THE MIRROR   (from a lender’s perspective) The Hunter Group
Lender’s Perspective of Your Client’s State of Affairs “What’s on a Lender’s Mind?”  by Yuri Piltser   of  IDB Bank
Discussion  Outline   <ul><ul><li>How the Banks View Your Client  </li></ul></ul><ul><ul><li>How to Help Your Client Becom...
When Your Client Looks in the Mirror –  what do they see? <ul><ul><li>ASSETS </li></ul></ul><ul><ul><li>LIABILITIES </li><...
Balance Sheet  <ul><ul><li>CASH </li></ul></ul><ul><ul><li>ACCOUNTS RECEIVABLE  </li></ul></ul><ul><ul><li>INVENTORY </li>...
EQUITY <ul><ul><li>Common Stock  </li></ul></ul><ul><ul><ul><li>Nominal Value, e.g. 1000 shares @ $1 = $1,000 </li></ul></...
EQUITY (CONT’D) <ul><ul><li>Major Advantage: it’s  their  Money!!! </li></ul></ul><ul><ul><li>Disadvantage: they’re  last ...
“ Credit is not a right - it’s a privilege.”  Anonymous  Lender
PAYABLES  <ul><ul><li>Your Client’s Goal: to stretch them (with trade’s consent, of course) as looooong as possible  </li>...
Comparison of Various Payment Methods
Why it’s “Good” to Have Liabilities (i.e. owe money)  <ul><ul><li>OPM is relatively cheap  </li></ul></ul><ul><ul><li>Buil...
“ EVERYTHING GOOD IS GOOD  ONLY  TO A POINT”   My Mom
The Other Side of Liabilities  <ul><ul><li>Must Be Repaid at some point!  (unfortunately)   </li></ul></ul><ul><ul><li>Inc...
Two Companies (with  same  capital)  Which one would  you  rather own?   <ul><li>Company 1 </li></ul><ul><ul><li>Assets $2...
Company 2’s Advantages  <ul><ul><li>With more assets, it’ll be able to create more sales on the  same  Capital Base </li><...
Company 2’s problems  <ul><ul><li>Leverage is very high and so is overhead  </li></ul></ul><ul><ul><li>Value of Owner’s Eq...
Importance of Reducing Liabilities  (up to a point!) <ul><ul><li>Leverage improves  </li></ul></ul><ul><ul><li>The company...
Three Ways to Reduce Liabilities  <ul><ul><li>Earn profits  and  retain them  </li></ul></ul><ul><ul><li>Speed up Asset Tu...
NWA TURNOVER  A/R Days + Inventory Days - A/P Days = NWA Turnover Days   Example 1 : 90 days + 90 days - 90 days = 90 days...
NWA TURNOVER  Example 1 : $200M (profit) x 4 = $800M  NWA of $2MM x 4 =  $8MM in sales   Example 2 : $200M (profit) x 12 =...
Another Advantage of Quick Asset Turnover  Assumption : The company’s overhead is $800M   Example 1:  No  pricing flexibil...
NINE KEYS TO SUCCESS
THESE KEYS WILL LEAD  YOUR CLIENT TO: <ul><ul><li>Maximize the value of relationships  </li></ul></ul><ul><ul><li>Maximize...
Key # 1: Quicken “Asset Turnover”  <ul><ul><li>Improves liquidity; creates cash to create more cash (i.e. your client need...
Key # 2:  They Need to Have Strong Trade Support  <ul><ul><li>Helps the company’s cash flow via improved NWA turnover (sho...
Key # 3: Have a  Strong  Capital Base  <ul><ul><li>The company is only as good as the quality of its assets  </li></ul></u...
Key # 4: Have a Low, Well-Managed Overhead  <ul><ul><li>Fixed Costs should always be kept in check  </li></ul></ul><ul><ul...
Key # 5 : Strive to Achieve an Optimum Capital Structure  <ul><ul><li>Maximize ROE while keeping a “risk of default” in ch...
Key # 6 :  Decommoditize  What They Sell!   <ul><ul><li>Your clients need to make their products/services less price-elast...
Key # 7 : Invest in MIS – be a master of your information domain! <ul><ul><li>Information (just like cash) is  KING !  </l...
Key # 8: Your Client Needs to Build a Strong Relationship with YOU   <ul><ul><li>You  should provide a Management consulti...
Key # 9 :  They need to Build a Strong Relationship with a Lender   <ul><ul><li>Like an Accountant, a Lender should be the...
Bonus Key #10 – the most important one of all (for you  and  your clients)   Enjoy every day of your Life! Make the best o...
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CPA Presentation for Hunter Group

  1. 1. YOUR CLIENT IN THE MIRROR (from a lender’s perspective) The Hunter Group
  2. 2. Lender’s Perspective of Your Client’s State of Affairs “What’s on a Lender’s Mind?” by Yuri Piltser of IDB Bank
  3. 3. Discussion Outline <ul><ul><li>How the Banks View Your Client </li></ul></ul><ul><ul><li>How to Help Your Client Become Financially Stronger </li></ul></ul><ul><ul><li>How Your Client Can Improve Their Cash Flow </li></ul></ul><ul><ul><li>9 Keys to Your Client’s Success ( plus a bonus Key #10 ) </li></ul></ul>
  4. 4. When Your Client Looks in the Mirror –  what do they see? <ul><ul><li>ASSETS </li></ul></ul><ul><ul><li>LIABILITIES </li></ul></ul><ul><ul><li>EQUITY </li></ul></ul>
  5. 5. Balance Sheet <ul><ul><li>CASH </li></ul></ul><ul><ul><li>ACCOUNTS RECEIVABLE </li></ul></ul><ul><ul><li>INVENTORY </li></ul></ul><ul><ul><li>FIXED ASSETS </li></ul></ul><ul><ul><li>INTANGIBLE AND OTHER ASSETS </li></ul></ul><ul><ul><li>ACCOUNTS PAYABLE </li></ul></ul><ul><ul><li>LOANS PAYABLE </li></ul></ul><ul><ul><li>OWNER’S EQUITY </li></ul></ul>
  6. 6. EQUITY <ul><ul><li>Common Stock </li></ul></ul><ul><ul><ul><li>Nominal Value, e.g. 1000 shares @ $1 = $1,000 </li></ul></ul></ul><ul><ul><li>Paid-in Capital </li></ul></ul><ul><ul><li>Retained Earnings </li></ul></ul><ul><ul><li>Less : Treasury Stock and Distributions (for taxes and otherwise) </li></ul></ul>
  7. 7. EQUITY (CONT’D) <ul><ul><li>Major Advantage: it’s their Money!!! </li></ul></ul><ul><ul><li>Disadvantage: they’re last in line when it comes to security/interest in their assets </li></ul></ul><ul><ul><li>Most expensive form of capital (the riskiest) </li></ul></ul><ul><ul><li>More equity (i.e. “skin in the game”) buys more OPM - “leveraging one’s assets” </li></ul></ul>
  8. 8. “ Credit is not a right - it’s a privilege.” Anonymous Lender
  9. 9. PAYABLES <ul><ul><li>Your Client’s Goal: to stretch them (with trade’s consent, of course) as looooong as possible </li></ul></ul><ul><ul><li>The more they can lean on Trade, the less they need to lean on Bank Debt and OE </li></ul></ul><ul><ul><li>Cash-to-Cash Cycle: companies with the shortest cycle win! The longer the payables, the shorter the Cycle, the greater the profits, the better the cash flow </li></ul></ul>
  10. 10. Comparison of Various Payment Methods
  11. 11. Why it’s “Good” to Have Liabilities (i.e. owe money) <ul><ul><li>OPM is relatively cheap </li></ul></ul><ul><ul><li>Builds your Client’s credit history </li></ul></ul><ul><ul><li>Increases your Client’s ROE </li></ul></ul><ul><ul><li>Finances sales growth </li></ul></ul><ul><ul><li>Healthy leverage is good leverage due to above reasons </li></ul></ul>
  12. 12. “ EVERYTHING GOOD IS GOOD ONLY TO A POINT” My Mom
  13. 13. The Other Side of Liabilities <ul><ul><li>Must Be Repaid at some point! (unfortunately) </li></ul></ul><ul><ul><li>Increases a company’s leverage </li></ul></ul><ul><ul><li>Increases the risk of corporate failure </li></ul></ul><ul><ul><li>May create stress for the company’s cash flow/working capital (i.e. liquidity), especially during downturns </li></ul></ul>
  14. 14. Two Companies (with same capital) Which one would you rather own? <ul><li>Company 1 </li></ul><ul><ul><li>Assets $2MM </li></ul></ul><ul><li>(A/R and inv. of $1MM each) </li></ul><ul><ul><li>Bank Debt $500M </li></ul></ul><ul><ul><li>Payables $500M </li></ul></ul><ul><ul><li>OE $1MM </li></ul></ul><ul><li>Leverage of 1 to 1 </li></ul><ul><li>Company 2 </li></ul><ul><ul><li>Assets $7MM </li></ul></ul><ul><li>(A/R of $4MM and inv. of $3MM) </li></ul><ul><ul><li>Bank Debt $5MM </li></ul></ul><ul><ul><li>Payables $1MM </li></ul></ul><ul><ul><li>OE $1MM </li></ul></ul><ul><li>Leverage of 6 to 1 </li></ul>
  15. 15. Company 2’s Advantages <ul><ul><li>With more assets, it’ll be able to create more sales on the same Capital Base </li></ul></ul><ul><ul><li>It should be more profitable due to more sales </li></ul></ul><ul><ul><li>ROE will be much higher as more profits are achieved on the same Capital base </li></ul></ul>
  16. 16. Company 2’s problems <ul><ul><li>Leverage is very high and so is overhead </li></ul></ul><ul><ul><li>Value of Owner’s Equity is in question (if assets are to be liquidated at 30% off) </li></ul></ul><ul><ul><li>High debts create a tremendous stress on the company’s margins and asset turnover - they’d better be very, very good! </li></ul></ul><ul><ul><li>Bank and Trade may get nervous </li></ul></ul><ul><ul><li>May be transferred into an ABL area (full monitoring, intrusive, lack of flexibililty) </li></ul></ul>
  17. 17. Importance of Reducing Liabilities (up to a point!) <ul><ul><li>Leverage improves </li></ul></ul><ul><ul><li>The company becomes more attractive to lenders </li></ul></ul><ul><ul><li>With new bank capital, growth opportunities increase </li></ul></ul><ul><li>(little secret: lenders love your client’s trade payables!) </li></ul>
  18. 18. Three Ways to Reduce Liabilities <ul><ul><li>Earn profits and retain them </li></ul></ul><ul><ul><li>Speed up Asset Turnover (i.e. reduce inventory and receivables and use that cash to pay down debt) and make more money by doing that </li></ul></ul><ul><ul><li>Infuse new capital into the company (either client’s own or new partners) </li></ul></ul>
  19. 19. NWA TURNOVER A/R Days + Inventory Days - A/P Days = NWA Turnover Days Example 1 : 90 days + 90 days - 90 days = 90 days (NWA turn 4 times a year) $200M (profit on each NWA turn) x 4 = $800M Example 2 : 60 days + 90 days - 120 days = 30 days (NWA turn 12 times a year) $200M x 12 = $2,400M [bought on 3/1, paid A/P on 7/1, got paid on 8/1]
  20. 20. NWA TURNOVER Example 1 : $200M (profit) x 4 = $800M NWA of $2MM x 4 = $8MM in sales Example 2 : $200M (profit) x 12 = $2,400M NWA of $2MM x 12 = $24MM in sales THREE-FOLD INCREASE IN PROFITS AND SALES DUE TO TURNOVER EFFICIENCY ON THE SAME CAPITAL BASE!
  21. 21. Another Advantage of Quick Asset Turnover Assumption : The company’s overhead is $800M Example 1: No pricing flexibility! (if prices are reduced, there’ll be a loss) Example 2: Strong pricing flexibility (may go down to 5% GM, i.e. $1,200M, and still be able to cover the overhead!)
  22. 22. NINE KEYS TO SUCCESS
  23. 23. THESE KEYS WILL LEAD YOUR CLIENT TO: <ul><ul><li>Maximize the value of relationships </li></ul></ul><ul><ul><li>Maximize the value of leverage </li></ul></ul><ul><ul><li>Maximize the value of knowledge </li></ul></ul><ul><ul><li>Maximize the value of their assets </li></ul></ul><ul><ul><li>Maximize the value of their equity </li></ul></ul><ul><ul><li>Maximize the value of technology </li></ul></ul><ul><ul><li>Execute and Create Wealth! </li></ul></ul>
  24. 24. Key # 1: Quicken “Asset Turnover” <ul><ul><li>Improves liquidity; creates cash to create more cash (i.e. your client need to try maximizing a number of cash cycles) </li></ul></ul><ul><ul><li>Make your client’s assets work for them </li></ul></ul><ul><ul><li>Allows your client to sell at lower gross margins, improving their competitiveness </li></ul></ul><ul><ul><li>Improves their profitability (as they make money on each NWA turn) </li></ul></ul>
  25. 25. Key # 2: They Need to Have Strong Trade Support <ul><ul><li>Helps the company’s cash flow via improved NWA turnover (shortens the cash-to-cash cycle) </li></ul></ul><ul><ul><li>The cheapest source of financing/OPM (typically free or below bank rates) </li></ul></ul><ul><ul><li>Helps the company’s sales growth; to grow sales one needs assets; to grow assets one needs trade and bank support </li></ul></ul><ul><ul><li>Builds necessary business relationships and makes your client an “industry player” </li></ul></ul>
  26. 26. Key # 3: Have a Strong Capital Base <ul><ul><li>The company is only as good as the quality of its assets </li></ul></ul><ul><ul><li>Past due, old receivables and obsolete inventory skew the capital’s true value (like clogged arteries, they weigh the company down and impact its financial health) </li></ul></ul><ul><ul><li>Retain! </li></ul></ul><ul><ul><li>Good capital base attracts OPM at attractive rates! </li></ul></ul>
  27. 27. Key # 4: Have a Low, Well-Managed Overhead <ul><ul><li>Fixed Costs should always be kept in check </li></ul></ul><ul><ul><li>High overhead puts a tremendous pressure to maintain high gross margins to pay for these fixed costs </li></ul></ul><ul><ul><li>Low overhead provides companies with flexibility; “lean and mean” infrastructure </li></ul></ul>
  28. 28. Key # 5 : Strive to Achieve an Optimum Capital Structure <ul><ul><li>Maximize ROE while keeping a “risk of default” in check </li></ul></ul><ul><ul><li>Too much equity - ROE may be too small; </li></ul></ul><ul><ul><li>Too much debt - Default risk may be too high; OPM may become too expensive and scarce; may wind up “relying on the kindness of strangers” </li></ul></ul><ul><ul><li>Ultimate high-wire act – where is that fine line for capital structure? </li></ul></ul>
  29. 29. Key # 6 : Decommoditize What They Sell! <ul><ul><li>Your clients need to make their products/services less price-elastic; add “proprietary” value </li></ul></ul><ul><ul><li>Create a want (a need already exists) by differentiating yourself from others </li></ul></ul><ul><ul><li>Protects them (somewhat) from price wars </li></ul></ul>
  30. 30. Key # 7 : Invest in MIS – be a master of your information domain! <ul><ul><li>Information (just like cash) is KING ! </li></ul></ul><ul><ul><li>Time is Money! </li></ul></ul><ul><ul><li>Good information flow will allow your client ( and you) to make better managerial decisions in a more timely fashion; should help asset turnover and the company’s efficiency; [one example is providing a Lender/Investors with more timely reports] </li></ul></ul>
  31. 31. Key # 8: Your Client Needs to Build a Strong Relationship with YOU <ul><ul><li>You should provide a Management consulting role; quasi-CFO role; assistance with MIS </li></ul></ul><ul><ul><li>Financial reporting and Tax advice </li></ul></ul><ul><ul><li>Provide Risk Assessment </li></ul></ul><ul><ul><li>You know lenders ( and what they want ) and may greatly facilitate the banking search process </li></ul></ul>
  32. 32. Key # 9 : They need to Build a Strong Relationship with a Lender <ul><ul><li>Like an Accountant, a Lender should be their trusted advisor </li></ul></ul><ul><ul><li>Lenders know about Government Programs (EXIM Bank, SBA programs, OPIC) </li></ul></ul><ul><ul><li>Your clients need to nurture the relationship by providing timely, quality information; No Surprises! </li></ul></ul><ul><ul><li>5 C’s which matter to lenders: Character, Capital, Collateral, Cash Flow, Capacity (... and some Common Sense ) </li></ul></ul>
  33. 33. Bonus Key #10 – the most important one of all (for you and your clients) Enjoy every day of your Life! Make the best of it!

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