Taylor intends to see that PlanGraphics doesn't become one of the broken ones. "When companies get in the red from an overdraft point of view, you expect that it's temporary and will be over with quickly. A bank doesn't like to make a credit decision every day, but that's what happens when we have an overdraft situation. We're put into the position of deciding every morning whether or not to shut the company down and take the consequences. It's John's responsibility to prove the bank right in our support."
Fiscally, yes. Philosophically, Antenucci expects his banker to be responsible as well. "We write a fairly detailed business plan, but whether they appreciate the content, I don't know," he says. "My guess is, they don't. They're looking at numbers: 'You've got an overdraft.' I'm not sure Gordon really understands why people hire us or what we actually do for them. If Farmers had that appreciation, they could do their own assessment of where the market is heading and where we're going in it. Right now, Gordon has to trust my judgment that the market is expanding and that PlanGraphics is positioned to take advantage of the opportunities."
"Sometimes a bank can get too close to a borrower," Taylor reflects. "There's a personal relationship you strike after months of doing business where you feel you've got to send good money after bad just to keep the ship afloat until help comes. It's awfully hard to cut somebody off from a loan. We try to anticipate when that point will come, and to counsel. That's part of our job. Whether borrowers listen or not is their prerogative."
On the last business day of 1994, Antenucci trekked across the street with enough paid invoices in his hand to put his line of credit into a positive mode and himself and Gordon Taylor into an absolutely glowing one.
The point of no return had been avoided -- for the time being.
CAN THIS MARRIAGE BE SAVED?
A Consultant's View
To many a fast-growth entrepreneur, "it stands to reason that if you're making money, you must have cash -- you feel it's that way. But," observes Garry Meier, "that's not how it is." Meier is a financial consultant, principal of a St. Louis firm named Strategic Planning Management and Implementation (SPMI). After a year of overseeing PlanGraphics' profitability, Meier summed up the situation this way: Antenucci had fallen into the "functional liquidity trap," and Taylor wasn't prepared to rescue him.
The cash trap is a condition endemic to service companies: Collection of money due for contracts typically is slow -- taking 120 days in Antenucci's case -- while operational payables pile up in 30- or 45-day cycles. Because it's booking future growth, "the company creates a pyramid of dollars owed versus dollars paid." Simply put, the company's always 90 days behind expanding payroll, overhead, and supplies.
"Banks are interval lenders," Meier says. "A bank will lend you a certain amount, and that's it for six months. They don't understand that labor-intensive businesses have more need to borrow than bank conventions recognize." A company granted a $200,000 line of credit can eat that amount in a month to take on a million-dollar contract. Then comes a five-month famine that sets the lender to worrying.
The solution? Greater flexibility in lending procedures. To accommodate the peaks and valleys, Meier would have banks like Farmers readjust their lending limits not monthly or even weekly, but daily. Farmers' money "is just not enough," Meier complains. It reveals a "conservative mentality working against small business." What would be enough is 90% of accounts receivable -- a standard Meier has successfully negotiated for other service clients. That might not solve all of PlanGraphics' problems, but it would keep a lack of cash from holding back the business.
And from endangering the bank. "In the kind of labor-intensive atmosphere that Antenucci is in -- what I call a 'gray-matter business,' where the product is what's in people's minds -- you have to grow at 5% to 8% a year because you have to give your people raises or they'll go somewhere else. Without them, the company will be unproductive and stop making money. Because the bank isn't flexible enough, it puts its own investment in that company at risk. That's the part the bank doesn't understand."
What holds banks back is that gray-matter businesses aren't as transparent as the manufacturing operations with which bankers are more comfortable. "In manufacturing you produce a hundred baseball gloves; when you ship them to the customer no one can argue with the fact that they received a hundred baseball gloves. And the receivable's good because in the worst case, you can go get your gloves back. And I don't just blame the banking system," Meier adds. "There's a supply-of-funds problem in general for these kinds of businesses because funders look at them with an M.B.A. mentality, with formulas. That's too bad because companies like PlanGraphics are significant users of funds when they grow, and they're good for the economy. Unfortunately, bankers don't supply the money as fast as the users use it. Therefore there's a gap in the investment world to satisfy companies like John's."
Still, in its readiness both to raise PlanGraphics' credit as its receivables balance grew and to relax loan covenants, Farmers has been better than average, Meier concedes. Has it been great? "Well, no bank is great with a business."
On the other hand, PlanGraphics now submits to Farmers detailed monthly financials reviewed by a certified public accountant. "John has made significant strides toward becoming a better businessman," Meier observes. "In our own company, there are two kinds of clients: those that are going to die and those that have a chance not to. The ones who have a chance not to are astute enough to admit, 'I don't get this financially, it's too complex for me, I need help managing it.' Antenucci is in that category. But the ones who are about to die think they're bigger than the world; 40% of our firm's business is handling Chapter 11s, and 100% of those companies are there only because of their founders' stubbornness -- there's nothing wrong with the businesses themselves. Entrepreneurs don't understand finance is the short of it."
