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OPERATIONS

The Accidental Automator

A small company's bank forces it to invest more in computerization, and in so doing saves the company.
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Company Profile

Clarklift's bank forced it to invest more in computerization. It's probably what saved the company

It's Friday morning, and Wayne Reece is sitting in his den, absorbing everything that's going on in his three central Florida forklift dealerships. Eyes glued to a laptop-computer screen, Reece scans the latest neatly formatted status reports E-mailed to him in a constant stream by his top managers. The reports detail every facet of sales, rentals, and service; they highlight trends and potential trouble spots for his company, Clarklift/FIT. Reece interrupts his scanning only to dash off several terse notes demanding more information or corrective action. Why has the service department allowed the backlog of jobs to climb from 50 to 117 in the past few weeks? Has one of the dealerships been neglecting sales of the higher-end forklifts in favor of the easier-to-sell, but less profitable, smaller models? After a while, replies to his queries start to trickle in. "That's more like it," he grumbles, reading one.

Reece uses computers to play the role of omnipotent boss. He's poured nearly $400,000 into information technology in the past two years--1% of his company's revenues over that same period--and he believes it's paid off in spades. Last year the company's net sales grew by 15%, and this year cash flow has improved by 14.5%.

Considering the sort of boost technology has given his business, it may seem hard to believe that Reece marched into the information age just a few years ago. Of course, many small-business owners find themselves pressured into automating by savvy accountants, demanding customers, or giant suppliers. For Reece, the party giving the marching orders was his bank.

Banks have always required small-business owners to jump through various financial and performance hoops to qualify for credit. But in general, if you had healthy sales, reasonable margins, and a consistent history of repaying your loans, you were in good shape for financing. Increasingly, though, banks want to see something else: solid computerization. When bank auditors stop by for a visit, they may be as likely to check out your software as your inventory. "The theory goes that if you can trust the computer systems, you can trust the company's numbers," says David B. Hilton, a vice-president for Citicorp's Global Equipment Finance Division, based in Harrison, N.Y.

Oddly enough, banks' tough new stand on automation may be good news for some small businesses. For Reece and his company, the added burden turned out to be a godsend.

Reece and information technology used to be on uneasy terms. In 1989 he purchased his first computer: a 286 notebook with a black-and-white display. After three days of tinkering, he pawned it off on a friend. "I hadn't sold a damn thing with it, so what did I need it for?" says Reece.

Back then, Reece was the top salesperson for a Tampa-based Caterpillar forklift dealer. A competitor, Clark Equipment Co., owned a flailing outpost in Orlando that had only $1 million in gross sales and had barely carved out 4% of the market share in its territory. Clark Equipment cut Reece a deal: if in one year as manager he could improve the company's standing in Orlando, he would have the option to buy the location. In a matter of months Reece had doubled sales, and by the end of the year he was ready to purchase the small dealership.

Reece was eager to become a company owner and willing to bring $125,000 of his own money to the table, but he still needed $500,000 in financing. Fortunately, the young entrepreneur--he was only 29 at the time--was spared the humiliation of trying to persuade a bank to take a chance on him. Because of his stellar track record in sales, Clark Equipment offered to help Reece get started by guaranteeing a capital loan--meaning that if Reece defaulted, the large manufacturer would pick up the tab. Reece borrowed the money from the Chase/Clark Credit Co., which became part of the Associates, a financing company in Irving, Tex., in 1995.

It seemed almost too easy. As long as Reece kept selling forklifts, the Associates would keep the vault doors open wide. Reece proceeded to take full advantage of his carte blanche status. By 1992, with close to 28% of the Orlando market firmly secured, Reece borrowed another $878,000 to acquire a dealership in Jacksonville. Two years later he opened up a third shop in Tampa and started selling both Clark and Mitsubishi forklifts in all three locations. This time the Associates forked over a $425,000 capital loan and $175,000 in revolving debt to cover accounts receivable.

The Associates kept a tight watch over its collateral. For every forklift Reece purchased, the Associates advanced the dealership a certain percentage of the cost. Each month Reece paid only interest, and then, when he eventually sold the asset, he would repay the entire debt. The Associates dispatched an auditor four to six times a year to study Reece's accounts receivable and count his inventory.

In effect, the Associates became Reece's de facto controller--a short-leash relationship that's common between commercial lenders and small dealerships. But the confining structure of the loan also had an unintended effect: it sheltered Reece from having to learn some of the fundamentals of his business. The only item Reece tracked was sales volume. As long as the finance company reconciled his account each month and gave him the OK, he assumed that his company was running smoothly. "When I started, I knew how to sell forklifts," says Reece. "I didn't know how to run a company, and I wasn't learning."

Clarklift was leaking cash. Though the profits on the brisk forklift sales were strong, they weren't enough to cover accounts receivable and the cost of inventory. When Reece opened the Tampa dealership and took on the Mitsubishi line, the cost of inventory doubled overnight, and the previous loans didn't close the gap. He borrowed another $600,000 from the Associates, but even that wasn't enough to keep him afloat for long.

Reece recognized that if he was going to pull himself out of the hole, he wouldn't be able to do it alone. So in October 1994 he recruited a chief financial officer: Ken Daley, a young financial whiz who had helped to grow a local Wendy's franchise from 17 stores to 57. If Reece, with his wide smile, substantial midsection, and hearty handshake, resembled the consummate salesman, Daley looked the part of the friendly bean counter, right down to his blue suit, slicked-back hair, and steel-rimmed glasses. Together the duo began a mad scramble to find another source of capital, and Daley quickly opened talks with Citicorp's Global Equipment Finance Division.

But Citicorp wasn't interested in tracking every forklift on the premises. The bank wanted Reece to track his own inventory and send in a monthly status report. There was just one sticking point: Reece would first have to prove that his computer systems were up to snuff. "It's simple," explains Citicorp's Hilton. "If clients don't have the proper systems to automatically generate the sorts of financial reports we need on a monthly basis, this sort of loan would overwhelm them."

In February 1995, Citicorp dispatched CMS Management Services Co., a South Bend, Ind., technology consulting firm, to audit Clarklift's information systems. By then Reece had invested some $100,000 in an IBM AS/400 running a proprietary inventory and accounting system created by Fetner Associates, of Asheboro, N.C. Even better, Daley knew technology: he had once owned a software company.

For a week straight, CMS hit CFO Daley with a barrage of financial questions that had to be answered quickly by culling the data from the computer. It was rough going. While most of the information was there in the system, it wasn't easily accessible. For example, when CMS asked Daley to produce a list of accounts receivable that were between 60 and 90 days past due, he knew that the database would spew about 500 pages of green-and-white-striped computer paper cluttered with arcane codes and numbers. "None of the answers just popped out of the computer," says Daley.

But he chose that moment to take advantage of a little-used software package already installed on his system--a program called Monarch, produced by Datawatch Corp., in Wilmington, Mass. Monarch billed itself as a data-access tool that extracted information from customized reports and inserted it in standard Windows-based applications. Daley opened the user's manual and didn't leave his desk until the next morning. By then, he was pulling information from the Fetner system and importing it into neatly formatted Excel spreadsheets.

In the fall of 1995, the bank offered Reece a $5-million credit facility. The ability to pull concise reports out of the computer data didn't just qualify Clarklift for the loan, however. It also allowed Reece and Daley to discover some bad business practices that had become institutionalized throughout the company. Armed with his new information skills, Daley discovered, hidden on the parts department's shelves, $150,000 worth of returnable unused parts, which were promptly returned for a refund of $127,500 (after manufacturers' restocking fees).

Reece was suddenly accumulating a treasure trove of up-to-the-minute information about almost every aspect of his company. Before the new system, for example, if he wanted to know which forklifts were being rented and which ones weren't, he'd have to walk the lot, count forklifts, and ask questions. Now he could just glance at a spreadsheet column labeled "rental utilization." If he wanted to know the percentage of sales quotes that had turned into sales, he simply pressed a button and read the report, instead of poring over sales logs. "It only takes me a second to know who to congratulate and who needs a good talking to," says Reece.

In Reece's dimly lit office, a giant stuffed dolphinfish hangs on the wood-paneled wall across from an equally large caribou bust, and the musty air smells of cigarettes mixed with grease. Reece gestures toward the caribou and says, "That's a dog--you should see the one I have at home." Each year Reece, an avid hunter, prepares for his sojourns in the hinterlands by shearing off his hair and growing a beard, making him appear slightly raffish--in short, not anything like the CEO of a $29-million company.

The technological sprint started by Citicorp's requirements has continued unabated; if anything, it's picked up momentum. Clarklift is now stocked to the gills with PCs--40 desktop units and 20 laptops--and the whole staff has access to its databases, as well as to E-mail and the World Wide Web. Reece and Daley have employed computers in every aspect of the company's operations and decision making. For example, salespeople used to close deals without touching a computer. After visiting with potential customers, a salesperson would scribble down figures on a pricing form and then hand them to a sales coordinator, who would key the figures into the computer and calculate critical numbers, such as the salesperson's commission and the net profit for the dealership. If everything added up, a quote would be mailed to the customer, and a second copy would be put into a three-ring binder.

Now salespeople enter sales figures directly into the customer's file in the contact-management software program ACT!, which they all have running on their Toshiba laptops. Reece himself did the programming that embedded an Excel template in Microsoft Word into ACT! so that the cost analysis is performed within the customer file. The numbers are then automatically imported into a sales-quote template. After the salesperson delivers the quote to the client, it's E-mailed to Reece. As Reece opens the E-mail message, a copy of the quote is automatically transferred and cataloged in a central database. Reece worked primarily on his own to set up the procedure, noting, "I just read the manual until the cover came off."

There used to be trouble managing accounts receivable, as well. Every so often, the billing department would pull a list of derelict customers from the system and mail their names to a collection agency. Now, once a month, as customer invoices are generated, the computer also produces a list of those customers who haven't paid their bills in 35, 45, or 55 days, and prints out one of three different dunning letters.

Marketing benefits, too. Daley generates long mailing or faxing lists based on any criterion he chooses. For example, at the end of the year, he pulls out the names of rental customers and faxes them a letter listing the benefits of owning. In the spring he faxes those who haven't had a coolant change in more than six months and warns them that their forklifts might overheat during the hot summer days.

As for inventory, Reece and Daley cut equipment inventory 50% last year, to $1.8 million. Combined with steady sales growth, that has contributed to a 33% increase in the company's overall return on assets. Reece remains highly leveraged, and by the end of 1996 the company waited an average of 55 days to get paid. But that figure is down from 57 days in 1995.

Citicorp acts like a proud parent. Hilton recently traveled to Orlando to honor Reece and Daley with the 1996 Distinguished Dealer Award. Reece returns the favor by acknowledging Citicorp's role in his company's technology-driven turnaround. "Citicorp pushed us into the pool," he says. Many small-business owners have uttered similar words about their bankers, but Reece means it in a nice way.

Joshua Macht (josh.macht@inc.com) is an associate editor at Inc. Technology.


Expert Opinion

Not every bank has a formal process for auditing a company's computer systems, as Citicorp does. But most look for a certain level of automation when considering a company for a loan. Here are the thoughts of two other major commercial lenders on the importance of technology for companies seeking loans.

Ken Coopman is an executive vice-president for the Bank of America's Southern California commercial-banking division, in Los Angeles. He makes commercial loans of $2 million to $100 million.

"The days of auditors' finding handwritten ledgers are gone. Even though we do not have a formal technology-systems auditing process when we enter the company, we want to make sure that we finish the due-diligence process feeling comfortable with a company's automation level. The better clients utilize information technology, the more confidence we have in their systems, and the fewer times we have to audit their books each year. That saves time and money for both parties.

"But it's not just the confidence factor. In the near future we will begin to exchange data with our clients electronically. It's likely that we'll soon move toward having our clients report to us on-line rather than mail us a borrowing certificate each month. It just makes sense from a cost perspective."

Paul Watson is vice-chairman of Wells Fargo and runs the Southern California office, in Los Angeles. He oversees financing deals for the commercial-banking group, with companies ranging from $10 million to $500 million in net sales.

"We shy away from doing deals with the hip-pocket operators of the past--meaning the guys who kept all their numbers on a small piece of paper in their pants pocket. We have teams of auditors who look at potential clients from all different angles. One team might do what we call a forensic evaluation of the company's automated systems.

"But with the small to midsize companies we have no cookie-cutter solution for how we inspect their technological capabilities. For example, if we are lending to a beer distributor, we want to make sure that it has the proper systems to accurately control inventory. But if we are lending to an agricultural company, we'll want to make sure it has systems for generating crop-rotation data, and we may want that information to be made available to us on-line. Technology isn't quite at the top of the list of loan criteria, but it's quickly rising."

Last updated: Jun 15, 1997




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