COVID-19 Advice- Banking Relationship

A close up photo of a DWH employee in a meeting.

Practical Advice for Communicating with Your Bank During a Crisis

As a follow-up to our communication on practical considerations regarding COVID-19 (https://dwhcorp.com/covid-19-advice/), we thought it would be helpful to offer a perspective on how companies can best communicate with their bank in this unprecedented time of crisis.   Since many DWH clients have been referred to us by banks, we are in a position to have concurrent relationships with both – and we have been talking extensively with many banks in recent weeks about the COVID crisis and the banks’ responses.

Every bank has had to adapt to the same challenges facing other businesses; uncertain forecasts, employees working remotely (if able to at all), financially challenged customers, and understanding government stimulus programs.

As you work with your bank, remember that it’s in the bank’s interest to work with you to maximize value and minimize risk in your business.  Your bank is a critical stakeholder in your business and can be a tremendous resource to you as you navigate this crisis.

Here are some practical things to consider as you communicate with your bank:

  1. Demonstrate emotional awareness – now more than ever

We are all people. We all have concerns about our family’s health and livelihood. This is a difficult time for everyone, including your lender.  As such, communication with your relationship manager and his or her team is more important than ever.  We no longer have the ability to meet in-person, so we must work even harder to convey concerns, ask questions, express gratitude, and calibrate our communication in an emotionally intelligent way. Doing so in a way that anticipates how messages and  shared information will be perceived can make a significant difference.

  1. Understand and clearly define your company’s situation

As we stated in our last publication (https://dwhcorp.com/covid-19-advice/), a detailed, rolling 13-week cash flow forecast (CFF) is the best tool to use for managing liquidity, especially in times of distress.  A good 13-week CFF will allow you to see how changes in sales, receivables, payables, payroll, and future expenses impact your liquidity and will let you take action.  A good model will also be easy to use and repeatable, so you can update it every week to adapt to the ever-changing world.

Take the time to build a 13-week CFF and use it to model out different scenarios based on your company’s situation and available options.  Be as honest and realistic as possible.  This will allow you to clearly define what your company is facing and will give you a great tool to communicate with your stakeholders, including your bank.

  1. Define sources of cash and risk

It is important to remember that banks are a source of liquidity, but they cannot be the only source.  Your lender’s ability to support your business in these times remains based on your ability to repay your indebtedness over time. In preparation for a productive virtual meeting with your lender, we recommend that you evaluate your 13-week CFF to identify “levers” or actions you can take to increase cash.  These may include:

    • Additional owner’s equity
    • Reduce customer receivable terms
    • Push payment terms with vendors
    • Reduction of labor costs
    • Negotiate deferral of rent or lease payments
    • Sale of unused assets

Determine how much cash each of these actions will generate and how long it will take for actions to impact your cash flow.

You should also identify risks in the forecast and actions you are taking to mitigate risks.

Taking these steps will ensure that when you talk to the bank, you are presenting a well thought out plan.

  1. Clearly define your request from the bank

Before you speak with the bank, you should be able to answer the following questions:

    • What is the exact ask?
    • What impact will this have for the company?
    • What is the company giving up in return (this may be additional collateral, increased interest, or personal guarantees)?
    • When does the company need it?
    • How long will the company need it?

These are questions the bank will ask to determine what they can and cannot provide.  Having answers ready will speed the process up.

  1. Pick up the phone

Don’t wait for your lender to call you. Also, don’t just shoot off an email. Make a personal connection over the phone and stay in touch as you learn more together. Together, you can work through this.

At DWH, we’re here for you, even remotely. Let us know what we can do to help. A lot of our clients have questions about what this all means for them, what options and conditions for support or exemptions apply, what implications are for employees, how to mitigate business value erosion, how to manage communications with banks/creditors/vendors/customers, etc.  Although we don’t have all the answers, we are here to help you.  Please feel free to reach out.

The Importance of Transition Before Transaction in a Family Business

Business colleagues discussing work

A transition is defined by Dictionary.com as “the process or a period of changing from one state or condition to another.” When most family business owners and their advisors think about succession planning or the sale of a business, the focus often becomes how to structure or transact “the deal”. The structure of any transfer of ownership in a business is very important and owners should have qualified advisors to help them consider the valuation, legal, tax, and financial implications of any deal. However, the value of a business is derived from its ability to generate and sustain positive cash flow. Therefore, before a business can have a successful transaction (sale or partial sale), it is important to have a successful transition. A business must focus on transitioning leadership, knowledge, and relationships and establish strong financial controls prior to the transaction taking place in order to maintain and increase the value (cash flow) of the business.

Leadership

In their book Built to Last, authors Jim Collins and Jerry Porras identified management development and succession planning as a key differentiator between visionary companies and their peers. These visionary companies often began planning for leadership transitions as soon as a new leader would start! For family businesses looking to sell or transition to the next generation, leadership transition is critical. Businesses must have a plan in place to gradually transition leadership responsibilities from the current generation (or leaders) to the next generation (or leaders) prior to a transaction. This will allow the business time to evaluate the new leaders and ensure a smooth hand off of responsibilities prior to the existing owners exiting the business.

Knowledge

Many family business owners have grown up in their business and know elements of the business better than their employees. Owners have critical knowledge that must be passed on to the next group of owners and leaders. This knowledge might include the history of the business, strategic planning, new product development, critical processes or systems, or understanding of the competition. These are pieces of information the next group of leaders or owners will need in order to continue the success of the business. Therefore, it is critical the knowledge is transferred from the current owner to the next group. This process will take time and should be planned out.

Relationships

Owners often have long established relationships with key stakeholders in their business. These relationships include customers, vendors, investors, lenders, and employees. However, these relationships could also be with key advisors, such as CPAs, lawyers, and consultants, or key community stakeholders. All of these relationships took time to develop and are important to the continued success of the business. Understanding that relationships take time to build, it is important the business develop a plan and timeline for transitioning these key relationships to the next group of leaders to ensure continuity and establish a process for educating the new leaders on the history of these relationships.

Financial Controls

Transactions are usually a leveraging event for a company. The company or new ownership takes on debt in order to buy some or all of the company from the previous owners. This increase in debt requires the company to have a strong balance sheet and sustainable cash flows in order to service the debt and the ongoing business. How can you ensure a transaction will be successful? Make sure the business has strong financial controls in place. These controls include regular, accurate, timely and relevant financial reporting, a 13-week cash flow forecast, separation of duties, and an effective finance and accounting team. These controls will help protect a business’ balance sheet and cash flow during and after the transaction.

The sale of a family business, to an external party or the next generation, is a significant event. The more a business focuses on transitioning leadership, knowledge, and relationships, and establishing strong financial controls prior to the transaction taking place, the better the chances of a successful transaction.

If you would like to discuss transitions related to family businesses, please contact us.

If you found this topic interesting, our strategic partner, JACO Advisory Group published content you may find relevant as well: Family Business Planning – Preparing the Next Generation to Lead and Who Should be Next in Line to Lead the Family Business?

Recognizing the Need for a Chief Financial Officer

Knowing the role of a Controller vs. a CFO

Controllers primarily focus on reporting and compliance in the finance and accounting areas. They manage and maintain accounting controls and related systems (the debits and the credits).  Controllers also manage and/or produce monthly financial reports, year-end reports, and other financial reporting. Their responsibilities often extend to handling tax compliance for federal, state, and local income taxes, as well as payroll, state sales, and property taxes. These are essential components to strong financial controls, which are critical for the growth and success of a business.

A Chief Financial Officer, on the other hand, is primarily focused on the future of the company. They’ll use financial, operational, and sales information to plan and forecast, allowing them to provide the company leadership with the information necessary to make decisions around direction and strategy. Additionally, the CFO should be spending a lot of time ensuring that the business has excellent financial controls in place so the information that is created is timely, relevant, and accurate. Because of this focus on the business at a high level, the CFO becomes a powerful strategic partner to the owner and other business leaders.

Another important role for a CFO is to spend significant time on external relationships in an effort to provide the business with the best information and resources available. These can be relationships with professional service providers like the company’s Certified Public Accounting (CPA) firm, banks, legal advisors, and risk/insurance providers. These could also be relationships with specialty providers like outsourced IT firms, software programmers, HR management firms, or consultants. CFOs are also often asked to develop relationships with key community partners.

Knowing when to bring on a CFO

“When should we consider a Chief Financial Officer for our business?” is a question we are frequently asked by clients. For every company, it can be different, and our firm does a very thorough analysis of a company before making a recommendation, but here are some scenarios where adding a CFO can be incredibly advantageous.

Scenario #1 – When leverage is increasing
Having just a controller makes sense when a company has a strong balance sheet and low leverage.  As the leverage increases, more care needs to be given to the balance sheet, forecasting, cash management, and external relationship management. This is where a CFO can help.

Scenario #2 – When business complexity or risk is growing
Perhaps your company is looking to acquire a business, implement a new ERP system, take on an equity partner.  All of these events create complexity and risk for the business and require someone with strong financial and analytical skills to properly plan for the events, forecast the impact of the event, solicit the appropriate outside advice, and support the business. This is the role of a CFO.

Scenario #3 – When financial information is lacking
Often, as a business grows, the financial information does not keep up. Larger businesses often need very specific information or forecasts in order to make strategic decisions. Sometimes the business doesn’t even know what information it needs! Having a qualified CFO to anticipate and create timely, accurate, and relevant information to support decision-making is critical for businesses to grow.


 

If you still have questions and would like to talk, please feel free to contact us.

Committing to Community

Over the past few weeks, DWH Director Jeremy Cosby completed “Committing to Community: Nonprofit Board Training.” This program was put on by the Association for Corporate Growth of West Michigan (ACGWM) and geared toward helping business professionals identify and evaluate opportunities to serve on nonprofit boards.

During three interactive sessions, participants were exposed to a variety of topics concerning the West Michigan nonprofit landscape, board membership and learned what it takes to serve successfully as a nonprofit board member. Several community members were brought in to share personal stories of successful and unsuccessful board memberships. Participants quickly realized that the first step to being a successful board member is to serve with organizations you are truly passionate about. One of the most common mistakes is to accept an invitation to join a board simply out of excitement for being asked. The third and final session provided attendees the chance to network with several local nonprofit leaders during a reception. It was the ideal way for participants to match up personal passions with community volunteer opportunities, and possibly even board-serving opportunities.

West Michigan is full of dedicated organizations, and even more dedicated people looking to make a difference in the community. This training was an exceptional way to showcase both while generating excitement for the dozens of participants who want to make a positive impact.  A huge thanks to Julie Metsker and the ACGWM for putting on this event, Varnum for hosting the sessions, and to everyone who stopped in to the session to share stories.

How to Not Fail at Conducting Interviews

Interviewing potential employees can be a long process, but it doesn’t need to be arduous. To ensure a successful outcome, establish a plan for the job search, assign an owner and stick to the process.

The first step, before the interviews even begin, is to define the need. This includes the specific job title and description, responsibilities, wages and benefits, reporting structure and the characteristics you are looking for in a candidate. This step may sound like a no-brainer, but many people do not define these details ahead of time which can cause confusion and tension later on and possibly cause a mis-hire.

Defining the characteristics of the desired candidate can take some time. They include four key items. It is extremely helpful to create a matrix/score card to use for rating and comparing candidates in each characteristic.

Four Characteristics:

  • Experience – What type of experience should the ideal candidate possess? Do you want a candidate that has worked in a start-up organization? Someone who is familiar with a company in a distress or turnaround situation?  Should they have experience managing a company that is larger than $10M in sales?  $100M? Hire a candidate who has the experience that correlates with the size of your company, stage of growth, and direction your company is headed.
  • Company Type – What types of companies has the ideal candidate worked for in the past? Family-owned? Private equity? Small business? These all require different skill sets and experience levels.
  • Skills – What skills should the candidate possess that are crucial for success in the role? Knowledge a specific ERP system?  Attention to detail?   Employee benefits management?  Lean manufacturing?  Listing the specific skills will assist you when you review resumes or conduct interviews.
  • Cultural Fit – What cultural skills should the person have in order to make the transition seamless? Do they need to be a team player?  Humble?  Possess strong leadership?  Knowing what it takes to thrive in your culture will improve the chances of a successful hire.

As an interviewer, a person needs to be just as prepared, if not more so, than the interviewee. Show up in the right state-of-mind to focus on the task at hand, don’t allow the first impression to influence your opinion and don’t talk too much. The interviewee should be doing most of the talking, not you.

Interview Matrix/Score Card

Three Step Interview Process

A three-step interview process is helpful to work through potential candidates.
1. Start with a 30-minute phone call or coffee meeting. This step doesn’t take much time out of your, or the candidate’s, day and allows you to determine if the candidate should continue in the process.
2. The next step is the first round of face-to-face interviews. These should be about 90-minutes and include two or three other team members in addition to the person leading the search. Once the interview is complete, the group should fill out the matrix/score card together.
3. Finally, the third step is another round of face-to-face interviews as a chance for candidates to meet peers, direct reports and get a tour. Be sure to set expectations with the team ahead of time and educate them about the matrix/score card, its importance and how to use it. The interview lead also needs to educate team members on the appropriate questions to ask and which questions are not allowed.

Don’t Forget Background Checks!

Background and reference checks are often overlooked as a part of the interview process. They are critical to knowing and understanding a candidate’s background. Have a background check firm lined up and ask the candidate to provide at least two professional references and one personal. The majority of former employers will provide only the basic information on a candidate. Because of this, look to LinkedIn and other places for mutual connections you can connect with to understand more of a candidate’s background and history. And, of course, be sure to conduct a social media audit as well.

Communication is key throughout the entire interview process. The job market is booming right now so it is highly likely your candidates are applying elsewhere. If you take too long with the interview process, or don’t keep the candidates up-to-date, you will lose them.

Finally, if there is any doubt on whether or not a candidate is the right person for the job, interview them again.