Evaluating and up-grading financial systems in preparation for intensive growth.
If you're aiming for intensive growth, then gear up your company's systems and controls beforehand
L owell Shindler and Steve Trapani wanted, needed to grow their jointly owned Bunn Coffee Service Inc. The coffee-and-beverage-service market in the United States was consolidating, even attracting foreign competition. "After 20 years in the business, we had to make major acquisitions or be swallowed alive," Shindler says.
But dramatic growth can wreck a company's profitability if sky-rocketing sales strain its financial systems and cash flow. So rather than simply chase after new sales, leaving financial systems struggling to keep up, Shindler and Trapani professionalized the back office of their Valley Stream, N.Y., business before they embarked on their accelerated growth plans.
"At $12 million in sales, it was already clear to us that our financial systems weren't as tight as they'd been when we were small and decisions were simple to make," Shin-dler says in retrospect. "If we didn't revamp them soon, we knew we'd find ourselves struggling to handle any large increases we'd make in revenues."
Because both Shindler and Trapani think of themselves as "supersalesmen, not financial whizzes," they chose to rely on the advice of Jeffrey M. Jaskol, a financial consultant from Mid-Atlantic Cos., in Mount Laurel, N.J.
The three men developed a simple strategy that enabled them to evaluate and upgrade Bunn Coffee's financial systems: set priorities by identifying inadequacies in current systems and analyzing the cash-flow cycle for ways to free cash for future growth, then set up new systems that will be both cost-efficient and flexible enough to accommodate expansion.
* Identify inadequacies. Shindler and Trapani easily identified two obvious pressure points on their financial systems. The first was the pension plan.
"Nobody at the company understood or liked it, even though it was costing us a fortune to fund and administer," complains Trapani. "And our health-insurance coverage had become unbelievably expensive and complex as we'd grown to a staff of 75."
Most of Bunn Coffee's other financial systems -- for inventory management, accounts receivable and payable, internal reporting, and communication -- had pretty well kept up with the company's needs during its 40% annual growth in recent years. But Jaskol's review did reveal one overlooked system in need of a tune-up: the company's share-holders' agreement was woefully inadequate for a business of Bunn's size and prospects.
* Analyze cash flow. Critical as it is, this stage is all too easily overlooked: after all, some cash-flow systems appear to function quite smoothly, revealing themselves only after careful inspection to be dangerously inefficient, costly, or outmoded.
Jaskol spent a day or two weekly for several months hunting for buried treasures in Bunn Coffee's cash-flow systems. Among the places he searched: the company's tax-planning system, asset management (assets at Bunn consist mainly of cash and a company-owned office building), expense controls, and banking transactions.
"Growing companies have got to look for every possible way to squeeze dollars out of cash flow," emphasizes Jaskol, "especially if they need to fund growth without much help from bankers."
Shindler and Trapani saw the logic behind the strategy. Like many midsize-business owners, they'd been forced to fund expenditures -- even the 20 small acquisitions they had made -- by using cash flow, mortgaging their building, and tapping into their personal savings.
Jaskol turned up two immediate priorities for Bunn: raising its minuscule bank credit line (with an eye toward eventually financing part of its acquisitions through borrowing); and minimizing taxes through more effective use of income-deferral strategies. An even more important goal, one that Trapani and Shindler aim to achieve within the next five years or so, is to hire a chief financial officer who will be capable of, among other things, maximizing the income potential from the company's various financial accounts and perhaps restructuring its real-estate holdings.
* Set up new systems. At first, Trapani and Shindler were put off by all the financial decision making that confronted them. "We're the kind of guys who want to think about tax planning and pensions long, long after our big decisions about sales and marketing get made," says Shindler with a laugh. But to be in a position to make a multimillion-dollar acquisition -- significantly larger than the biggest acquisition they had ever made -- they knew it was time to act. And act they did.
For starters, they rewrote the shareholders' agreement to include sophisticated planning for such contingencies as Bunn's outright sale or one partner's buyout because of retirement, disability, or death. Because of the company's ever-increasing book value, insurance costs are high, so Bunn is currently funding a portion of the shareholder-buyout agreement through a combination of tax-advantaged vehicles. These include the company's qualified retirement plan, the severance program, and other tax-deferred arrangements.
Trapani and Shindler have also discarded their old pension plan entirely since the "defined benefit plan" was set up to provide payouts only to employees who stayed until age 60, which just didn't meet the needs of the company's somewhat transient work force. In its place they established a profit-sharing plan with a 401(k) plan attached. This was much more appealing to their younger work force. "It's a real kick," says Shindler. "We're saving money because our actuarial and administrative costs are lower, and meanwhile our employees are much happier because they can see the benefits they're getting."
As a fast-growing company, Bunn Coffee's health-insurance premiums had been rising by 40% to 60% annually in recent years, prompting Shindler and Trapani to consider scrapping the coverage entirely. But they've come up with a far better solution. By comparison shopping they found a carrier offering options that could be tailored to meet Bunn's needs and make it more accessible to the employees. They've been able to cut costs by some 20%, saving the company more than $85,000 in the first year alone. They now plan to comparison shop among carriers at least every two or three years.
With their financial systems awry, no bank wanted them. "Our banker didn't understand our business, so he wouldn't even loan us as much as we had on deposit with him," says Shindler resignedly. That led to periodic cash-flow crises. But with Bunn's new financial systems in place, cash flow looks better, and that's just what bankers pay attention to when it comes to evaluating a service company's prospects.
Shindler and Trapani were also able to cut their taxes by channeling profits into pension plans and funding the tax-advantaged vehicles mentioned above. "As an S corporation, anything the partners can do to defer their receipt of profits helps cut taxes and improve their overall cash flow," emphasizes Jaskol.
The complete overhaul took time -- in all, nearly two years. But the good news is it worked. The new systems cut costs and reduced the company's tax bill, streamlined cash flow, and ultimately helped Shindler and Trapani build essential contacts within the banking community. The partners believe their systems are ready to handle the major acquisition they've been dreaming about for years. "We can finally see ourselves growing," says Shindler, "beyond what we ever would have imagined possible when we started selling coffee 20 years ago."
Once is not enough
Here's how to make a financial tune-up painless but effective:
Schedule tune-ups regularly. Analyze your financial systems every three to five years, more frequently if you plan to make a major acquisition, diversify product lines, or expand facilities.
Involve as many of your employees as possible. No one knows better than your warehouse or customer-service people if your inventory management system is overloaded -- so don't spend so much time talking to your bookkeeper that you forget to consult your real systems experts.
Think of each system as a mini-profit center. It'll help you devote the attention necessary to keep down health insurance, pension, and other employee benefit costs.