FRANK & BRESLOW, P.C.
– ATTORNEYS – AT – LAW–
“EDUCATING CUENfS To AVOID EMPLOYMENT LmGATION”
DESK REFERENCE OF LABOR AND EMPLOYMENT LAWS
•
Following is a summary of Jaws affecting employment, which should not be construed as providing
legal advice. Legal advice should be rendered depending on specific facts, at which time competent
professional counsel should be sought.
DISCRIMINATION/CML RIGHfS Acrs/Trru VII
Federal and state laws prohibit employment practices (such as hiring, discharge, promotions and pay) which are
based upon an individual’s race, color, religion, national origin, sex/gender (including pregnancy), physical or
mental disability or veteran status. State laws may create additional protected classifications such as marital
status and sexual orientation and can impose individual liability upon those found responsible for the discrimina-
tion. Employers can be liable for retaliating against employees who complain about unlawful discriminatory em-
ployment practices.
SEXUAL HARASSMENT
Sexual harassment occurs when an employee is subjected to unwelcome or offensive sexual advances, requests for
sexual favors or other offensive physical and/or verbal conduct based on sex. Employers can be liable for retaliat-
ing against employees who complain about unlawful harassment.
AGEI[)ISCRIMINATION (ADEA) &.. OLDER WORKER BENEFIT PROTEOloN Acr (OWBPA)
Federal laws prohibit employers from discriminating against persons over 40 years of age on account of their age.
Some state laws prohibiting age discrimination do not have a minimum age threshold. The OWBPA requires that
a release which waives an employee’s right to sue for age discrimination must comply with stringent rules.
WAGE/HoUR REQUIREMENTS
The Fair Labor Standards Act (FLSA) and state labor laws govern hours of work and the payment of wages. The
FLSA and state laws establish the minimum wage. The FLSA prohibits sex/gender based wage discrimination and
defines who is eligible for overtime pay and the number of hours an employee must work to receive it. It is a
common mistake to believe employees are automatically exempt from the payment of overtime simply because
they are paid a salary.
EQUAL PAY Acr
Federal law prohibits employers from granting employees different payor benefits based on sex, if the work
performed requires equal skill, effort and responsibility,
MIurARY SERVICE &.. MurARY lEAVE
Employers may not discriminate against individuals who enter military service, including reserve duty. Upon
return from service, individuals must be reinstated toequivalent positions.
WORKERS’ CoMPENSATION RETAUATION
The NYS Workers’ Compensation Law prohibits an employer from retaliating against an employee who files or
threatens to file a Workers’ Compensation claim.
PHONE: (631) 756-0400 FAX:(631) 756–0547
E-MAIL: attys4mgmt@laborlaws.com
WEBSITE: www.laborlaws.com
BOR AND EMPLOYMENT LA WS
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STATE LABOR LAWS AFFECTING EMPLOYEES
New York State labor laws regulate several aspects of the employment relationship. not covered by federal law
including lunch breaks, split shifts, uniform allowances, pay days, notice terms upon termination, deductions from
wages, and loans to employees.
FAMILY AND MEDICAL LEAVE ACT
Under this federal law, employers with fifty (50) or more employees must provide up to twelve (12) weeks of
unpaid leave to an employee because of the employee’s own serious health condition, to allow the employee to
care for a family member (child, spouse, or parent) with a serious health condition, or for the birth, adoption, or
foster–care placement of a child. To be eligible for leave, employees must have worked for the employer for at least
one year and 1,250 hours in the twelve (12) months preceding the leave request. An employee returning at the end
of his/her permitted leave generally must be reinstated to the same or a substantially similar position. New Jersey,
Connecticut and Rhode Island have family and medical leave laws similar to the federal statute.
IMMIGRATION CoNTROL AND REFORM ACT (IRCA)
Federal law prohibits hiring or recruiting unauthorized aliens and requires employers to verify the identity–and
eligibility to work of all employees hired after November 1986. The Act also establishes record–keeping require-
ments for all applicants for employment, including U.S. citizens, regardless of position held with the company.
WORKER ADJUSTMENT AND RETRAINING NOTIFICATION ACT (WARN) _
This federal statute requires all employers with 100 or more employees to give employees sixty (60) days advance
notice of a “plant closing ” or “mass layoff. ” If an employer does not give the required notice, affected employees
may recover pay and benefits.
CoNTINUATION OF HEALTH BENEFITS (COBRA &. HIPAA)
These federal laws require employers of more than 20 employees to provide employees and their families covered
under the employer’s Group Health Plan the right to continue medical coverage at their own expense for an ex-
tended period of time. HIPAA allows portability of health coverage from company to company and requires the
former employer to document previous health coverage, so all or part of pre-existing conditions requirements are
waived. New York State has a mini-Cobra law which applies to employers with less than 20 employees.
WORKPLACE SAFETY (OSHA)
The Occupational Safety and Health Act of 1970 was enacted to ensure employees’ work environment is free from
hazards that cause or are likely to cause death or serious injury. Significant penalties are provided for recognized
hazards identified during an inspection. Employers must post required forms in February of each year.
POLYGRAPH PROTECTION ACT (PPA)
This federal law prohibits random polygraph testing of employees and polygraph screening of most job applicants
and employees in most cases.
EMPLOYEE RETIREMENT INCOME SECURITY ACT (ERISA)
A comprehensive federal statute regulating pension, health and some severance plans, whether insured or self
administered. It defines _ the fiduciary responsibilities of trustees of the plans, and contains civil and criminal
penalties for violation of significant restrictions, including prohibited transactions and notice requirements.
Complementary Initial Consultation
Call for Firm Brochure
PHONE: (631) 756-0400 FAX: (631) 756–0547
PEOPLE·S WORK NEEDS
Compensation
Recognition
Fun
Personal Growth
Challenge
Convenience
Communication
8. Security
/
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From The CEO’s Toolkit
Copyright © /999-2002 Corporate Partners Inc. All Rights Reserved. ceotools@mindspring.com
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rt –Term Debt
on Assets
on Equity
SOLVENCY
1. Current Ratio:
2. Quick Ratio
SAFETY RATIO
3. Debt to Equity:
PROFITABILITY
4. Gross Profit Margin
5. Pre-Tax Profit Margin
RATIO ANALYSIS
Current Assets
Current Liabilities
Cash+Accts. Receivable
Current Liabilities
Total Liabilities
Equity
Gross Profit
Sales
Profit Before Tax
Sales
3
ASSET .MANAGEMENT
6. Sales to Assets Sales
Total Assets
/
7. Return on Assets
8. Return on Equity
9. Inventory Turnover
10. Inventory Turn Days
11. Accts. Rec. Turnover
12. Collection Period
Profit before Tax
Total Assets
Profit before Tax
Equity
Cost of Goods Sold
Inventory
365
Inventory Turnover
Sales
Accts. Receivable
365
Accts. Rec. Turnover
13. Accts. Payable Turnover Cost of Goods Sold
Accts. Payable
14. Accts. Payable Days
365
Accts. Payable Turnover
/
TEe
AN INTERNATIONAL ORGANIZATION OF CEOs
RESOURCE PRESENTATION SUMMARY
-+-
DANGER SIGNS AND DOLLAR SIGNS:
How To KEEP YOUR BANKER
FROM BURYING You
LEE KATZ
INTRODUCTION
The three most common phrases (regarding bankers) from business owners are:
• My banker does not understand my business.
• Bankers only lend money when you can prove you don’t need it.
• My banker got me in trouble.
Bankers and business owners are frequently at odds with each other, mainly because they come
from very different backgrounds and .have very different mindsets. Understanding how your
banker thinks and what they look for can have a positive effect on your banking relationship and
make it easier for you to get money when you need it.
Banks are facing a lot of external pressure these days. They are still feeling the effects of the
recession. Junk bonds and leveraged buyouts, although no longer front page news, are still
having an impact. The Federal Reserve is carefully scrutinizing banks‘ lending policies.
Bankers are working under new, more restrictive definitions of and regulations for highly–
leveraged transactions.
The industry itself is undergoing a major shake-out. Banks are merging all the time, which
creates a lot of fallout as customers get squeezed into new bank formats and procedures.
THE BANKER’S C’S OF LENDING
Bankers look at a lot of criteria when making loans. The following are the most important:
Character: This is where your mettle gets tested. When the chips are down, bankers
want to know that you are going to do the right thing. Character is very important to
bankers.
Capacity: This is your ability to repay. Bankers need to know if you have champagne
taste but beer pocketbooks.
Current financial statements: At a minimum, bankers want your financials on a
quarterly basis. Often they require monthly statements.
Carelessness: This usually comes down to poor record keeping. Carelessness can cause
banks to lose loans and/or lose their federal loan insurance, so they want to know how
you run your shop.
TEe Katz, Page 1 of 11
Complacency: This tells the bank how you react to things. Do you keep the bank
updated on what is going on in your business or do you tell them only when you
absolutely have to?
Capital: This is your net worth (total assets minus total liabilities). When you have a
bad year and you have a turnaround, you have no equity. Banks are always looking for
an extra cushion of equity in case you have a bad year. They look for things like how
big your salary is, how much money you leave in the company, etc.
Contingencies: Does the bank know who will run the business if you die suddenly or
become incapacitated? Bankers are very concerned about stability. They want to know
that you have a plan in place in case of a catastrophic event.
Continuity: Is there a plan for orderly succession of the business if you die suddenly?
For example, do you have a buy-sell agreement, life insurance, or some other plan to
fund the succession and continued operation of the business?
Conditions: This refers to external factors such as the economy, government
regulations, etc. Bankers look at who you are selling to and how your product fits into
the market.
Collateral: Collateral does not repay a loan, but bankers will try to get as much
collateral as they can because they are lousy at liquidating. The more collateral they can
get, the more protected they are.
Competition: Bankers are more concerned about their competition with other banks than
with your competition.
Controls: Bankers always want to know what kind of controls you have in your
company. A large percentage of companies suffer from embezzlement and stolen funds.
Bankers want to know that you have checks and balances in the following areas:
• Payroll clerks: They can create fake employees.
• Controllers: They can create fake vendors.
• CFOs: They can wreak all sorts of havoc.
Require your CFO to take two consecutive weeks of vacation each year. A lot of things
happen that your accountants never check on. When your CFO goes on vacation, sit in
their office and check the mail. Work with the clerks and sign every check. You will
be surprised at what you find. Even in cases where there is no fraud, you can find ways
to save money.
TEC
Katz, Page 2 of 11
Crooks: People have been known to put up counterfeit stock certificates as collateral.
Bankers have safeguards, but they always have to be on the lookout for fraudulent
borrowers.
Communication: This is a necessary evil. You don’t want to keep things from your
banker. You may want to slow things down for strategic purposes, but you don’t want
to withhold information. Bankers need to know what is going on. Plus, the only way
you can demonstrate that you have the character, continuity, etc. is by regular
communication. Bankers hate surprises. When they get surprised, their knee–jerk
reaction is always to call the loan.
If you do one thing in your banking relationship, communicate. It’s a plus when you do
it; it’s a very big negative when‘ you don’t. Visit your banker at least four times a year.
Take them out to lunch, visit their office, or have them visit your business, but meet with
them in person at least four times a year. The best time to invite them to your place is
Friday afternoon at 3:00 p.m. (because they like to take off early on Fridays).
How To IMPROVE YOUR BANKING RELATIONSHIP
Your image as CEO or owner is important. Bankers are very conservative; they don’t like
flash. The image of your company is also important. When your banker comes out to walk
through your company, they get a feeling for your business. If your image and your company’s
image is sloppy, the banker isn’t going to be inclined to lend you money.
A banker is like any other vendor or supplier, except they are selling money. Just as you have
second and third vendors, you need to have a second bank. You need the protection and
flexibility that a second bank offers.
There are many reasons why your primary bank might cut you off. Banks can “fallout of love”
with an industry. They may love your business right now, but it can change overnight. Banks
can change their dollar limits. Once they reach that limit, you are out of luck.
Banks divide their portfolios into sections. For example, they may want 25 consumer loans,
20 for contractors, etc. Once their percentages are set, it is almost impossible to get them to
budge. The Federal Reserve can also force them to change or reduce their portfolio categories.
A second bank gives you flexibility when these things occur. It can also give you competitive
rates which you can use to negotiate better rates with your primary bank. Having a second bank
gives you leverage to get better service from your primary bank. You do this all the time with
your other vendors; do it with your bank as well.
TEC
Katz, Page 3 of 11
If you have excess cash, a second bank will often offer more competitive rates for your
investment funds. They may be willing to reduce their float days or their bank charges. They
may give you a better deal on handling your 401K, ESOP, or pension plans.
Another reason for having a second bank is to have a fallback position in case your first bank
suddenly gives you the boot. So you always want to have a second bank that you’ve educated
about your business and that wants you. It’s like a courting process. You can’t just go up to
a bank, tell them your first bank has kicked you out, and expect them to want to do business
with you. You have to court them and educate them over time.
Let them try to lure you away from your first bank. Open up a personal or payroll account or
take out a personal loan so they can get to know you. There are many things you can do with
a second bank to give them the opportunity to know you. Once you leave your first bank and
go with your second bank, start the process allover again. You must have a fallback position
at all times.
Bankers like to support their community, so bank locally if you can. It doesn’t hurt, however,
to talk to banks outside your community. With bigger loans, you can often get more flexibility
with out-of-state banks.
Banks also have lending limits for each customer. Once you hit that limit, you’re stuck unless
you have a second bank to fall back on.
CASH MANAGEMENT
Most banks offer zero balance accounting, so shop around to get the lowest fee for that service.
Typically, the bank will tie your account into your loan. When money comes in from your
receivables account, the bank uses it to pay down your loan. Or, if you have a lot of payables
come in and no cash in the receivables account, the bank borrows from your loan account to
cover the payables.
In the course of doing business, you sometimes have free balances sitting around. There may
be times when payab1es come in, the cash is there to pay it, and the loan has been paid down.
In that case, the free money just sits there. You can (and should) turn that money into an
investment account. Even if you don’t have free dollars sitting around, it will still minimize
your interest charges.
Lockboxes are not the great cash management tools banks make them out to be. Banks will
generally tell you that lockboxes are a great way to hold down your effective cost of interest.
Don’t fall for it. One day’ s worth of interest is not worth the control it gives the bank. If you
are making a profit, if things are going good, if you aren’t being squeezed by your bank, and
if you‘re trying to minimize your interest and maximize what you can make on your free
TEe
Katz, Page 4 of 11
1
account, then lockboxes are okay. But as soon as you have problems, they start causing you
trouble.
Get an analysis statement from your banker every month. If you aren’t currently getting it, ask
for it. Analysis statements clearly show all the charges the bank hits you with. You may also
find that you are leaving excess funds in accounts and not getting anything for it.
An analysis statement shows the total ledger balance and the collected balance. Collected
balances operate under the concept of “float days.” The bank codes your account with a float
number and subtracts your availability to corne up with your total collected balance. The more
the bank takes out in float, the worse your collected balance which affects your earnings rate.
To determine service charges, banks look at the number of deposits, wires, items in a deposit,
etc. and total them up according to a set schedule of fees. Then they tack on an additional
charge (usually around 15 ) so they can make a profit on those services. They subtract these
charges from your account earnings and automatically debit your account.
Checks from local banks clear inone day. If you’re getting a lot of local checks and your bank
has you down for two or three days float, you’re missing valuable float time. You can’t avoid
the service charges, but you can certainly negotiate the float days. The bank never actually
gives you the account earnings; they just use them to determine your service charges.
/
COMPANIES WHO HAVE PROBLEMS WITH THEIR BANKS
Banks watch out for the following companies:
|
• |
Small companies |
|
• |
Start-up companies |
|
• |
Single product companies |
|
0 |
Declining industries |
|
• |
Rapid growth companies |
|
.. |
Leveraged buyouts |
|
• |
Mergers and acquisitions |
|
• |
Government regulated |
TEC
Katz, Page 5 of 11
~
Bankers are particularly wary of merger and acquisition situations because of all the problems
that tend to arise. If you don’t change the culture of the company you purchase, the acquisition
will fail. Also, profits often tend to disappear as soon as you buy a company. Unless you can
show the bank how you are going to manage and control the acquired company, they are not
going to fund the loan.
How YOUR GoALS
AFFECT BANKING RELATIONSHIPS
Because the owner wants to pay less taxes, privately held companies usually have a goal of
minimal profits. Using GAP principles, the owner usually tries to build as many reserves as
possible into their financial statement so they can weather bad times. Bankers need to know
about and understand your cushions. If you’re taking out $250,000 a year in salary and the
company is showing $2 a year in profits, the bank is going to be concerned. It‘s those kinds
of things that cause bankers to ask for personal guarantees.
In public companies, the goals are opposite. You want to show as much profit as you can to
increase the price of the stock and be able to pay a dividend.
/
In private and public companies, if you are dressing the business up for sale, you want to show
as much profit as possible so you can get a higher multiple. The problem with dressing it up
for sale is the buyer typically looks at 3-5 years of financial statements. You can‘t just show
high profits for one year and blame the other years on the built-in reserves because the buyer
will discount those reserves.
If you want to sell your business in five years, start dressing it up for sale now. Explain to your
banker what you are doing and take out a reasonable salary. Look at what a potential buyer
would pay someone to do your job. A quarter of a million dollars may be reasonable to you,
but if a buyer would only pay someone $100,000, then don’t take out more.
TYPES OF LENDING
Short-term loans: Bankers look at one year or more as long-term and anything less as
short-term. Most short–term loans are for 90 days. If you ask the banker for a 90-day
loan, make sure you can realistically pay it off in 90 days. When the banker makes that
loan, he writes a credit memo which goes higher up in the bank. At the end of 90 days,
it doesn’t look good if you don’t pay up. It’s much better to negotiate different terms
up front than to not pay back the loan on time. You don‘t want to make your banker
look bad.
TEe Katz, Page 6 of 11
\
If you are going to be out of town on the 91st day, make sure somebody else takes the
check over to the bank on the 90th day. If you are on vacation and the loan gets paid
late, you get put on a past-due list. People start to wonder why you aren’t paying on
time and your reputation with other creditors goes downhill.
Term loan: Anything over a year is a term loan. Bankers always want collateral on
term loans.
DIP flnancinge This is debtor in possession financing. Bankers will lend you money
in bankruptcy, but the rates are very expensive. However, if structured properly, this
is one of the safest loans a bank can make. The bank gets “super priority” in
bankruptcy, meaning they come ahead of everybody else (except payroll taxes and some
payroll). Typical rates are two to four points over prime.
Unsecured loan: Most privately held business owners have to take out this kind of loan
where you agree to sign over the “house and first-born.” Try to prepare and control the
bank so you don’t give them everything up front. If the bank gets everything up front,
you have nothing to negotiate with if you get in trouble.
LoAN DOCUMENTS AND AGREEMENTS
/
The bank has a standard form for loans, which is usually a few inches thick. Most people sign
these forms because they think they have to. Wrong. You don’t have to sign the standard form
as the banker gives it to you. In fact, you don’t want to sign it because there are pitfalls in the
“boiler plate” language contained in the form. Spend the money to sit down with your lawyer
and carefully go over the forms. There are a number of specific issues to look out for.
Typically, the standard forms don’t offer a “cure period,” a time that allows you to “get well”
if you violate any loan covenants. You need to build in a cure period because you don’t want
the bank to call your loan right away. This is especially important if your banker isn’t around
and somebody else will be handling your loan.
Loan documents also contain default clauses. Some of them are defaults with a little “d” and
some are defaults with a big “D.” Get as many with the little “d” as you can because that means
the whole thing doesn’t blow up if you are in default. In particular, try to get rid of the
“deemed insecure” clause which allows the–bank to pull the plug if they are uncomfortable with
you for any reason.
You also want to protect against the “right of offset,” which states that the bank can freeze any
money you have and offset it against the loan. If you negotiate a cure period, you can avoid this
unpleasant action. Some banks will also want an offset clause against your personal assets.
That’s a very good reason to have some of your personal assets at a different bank.
TEC
Katz, Page 7 of 11
/
–—-–—-–—-–————-—–———-—————–————–—-—-–
/
\
The right of offset is also on the back of the signature cards you sign at the bank. So even if
you have an unsecured loan, you give the bank the right of offset when you sign that card.
With most personal guarantees, banks have the right to come after your personal assets first.
That’s the last thing you want to happen. Instead, you want to require the bank to exhaust all
their legal rights against the company before your personal guarantee comes into effect. The
time to negotiate that clause is when everything is going well, not when you are in trouble. The
ideal time is when you first begin talking with your second bank; that’s when your primary bank
is willing to give up the most to get your business.
You can also reduce and limit your personal guarantee over time. For example, you can
negotiate that, if your business performs well over a set amount of time, the bank will reduce
or eliminate your personai guarantee. If your company has been profitable for three to five
years in a row, you are managing the business sensibly, and you are leaving some money in the
business, talk to your banker about reducing or eliminating the personal guarantee. If they don’t
want to listen, go to your second bank. Never fall for the standard line that the bank never
releases small companies from personal guarantees.
“Joint and several” liability is when more than one person guarantees a loan with personal
assets. If the company gets in trouble, the bank will generally go after the person with the
deepest pockets. If that person has enough money to cover the loan, the bank doesn’t go after
the other guarantors. That person then has to go after the other guarantors to get his money
back.
You don’t want to be the deep pocket and there are several ways to protect yourself. If there
are two of you, set up the personal guarantee as 50/50. Or, if the company reaches a certain
level, you can put up collateral to protect your part.
Asset-based loans usually contain a clause that allows the bank to notify your customers when
the bank takes over. Modify that clause so the bank can only notify customers after a cure
period. Banks tend to send the wrong message that can scare off customers. You want to avoid
that if at all possible.
LoAN PROPOSALS
Typically, business people submit very thick business plans when applying for loans. To make
it easier on your banker, include a summary sheet that outlines all the key bullet points:
• The date
• The borrower (This is important if you have more than one entity.)
TEe Katz, Page 8 of 11
• The type of loan
• Amount
• Use of the proceeds
• Term of the loan
• Closing date
• Collateral
• Interest rates
• Repayment schedule
• Guarantees
• Source of repayment
• Secondary source of repayment
• /Attachments (financial info, management resumes, etc.)
Spell things out; it will make your negotiations much easier. Build in the flexibility you need.
Don’t offer all the collateral you have up front. If the bank comes back and wants more, you
will have nothing left to give.
Take control of the process. Don’t ask your banker, “What kind of rates are you going to give
me?” Turn it around. Say, “I want prime plus one (or whatever the rate is) on this loan.”
When your banker balks, you can say, “Gee, my second bank said they would be happy to give
me that rate. “
Say you want no or limited guarantees. When your banker asks why, say other banks have
expressed an interest in your business.
You also need to protect your Dun and Bradstreet credit reports, so review them on a regular
basis. Some of the information may be old and out of date. Also, your trade creditors may say
things about your company’s payment history that are way off base. You have the right to
challenge any information on the reports that isn’t accurate.
TEC
Katz, Page 9 of 11
10 on the 91st day, make sure somebody else takes the
lth day. If you are on vacation and the loan gets paid
ist. People start to wonder why you aren’t paying on
her creditors goes downhill.
–ar is a term loan. Bankers always want collateral on
n possession financing. Bankers will lend you money
very expensive. However, if structured properly, this
ank can make. The bank gets.” super priority” in
ihead of everybody else (except payroll taxes and some
.0 four points over prime.
held business owners have to take out this kind of loan
“house and first-born.” Try to prepare and control the
rything up front. If the bank gets everything up front,
th if you get in trouble.
tfENTS AND AGREEMENTS
which is usually a few inches thick. Most people sign
: to. Wrong. You don’t have to sign the standard form
)u don’t want to sign it because there are pitfalls in the
form. Spend the money to sit down with your lawyer
are a number of specific issues to look out for.
r a “cure period,” a time that allows you to “get well”
need to build in a cure period because you don’t want
l’his is especially important if your banker isn‘t around
.r loan.
.uses. Some of them are defaults with a little “d” and
; many with the little lid” as you can because that means
u are in default. In particular, try to get rid of the
.he.bank to pull the plug if they are uncomfortable with
:ht of offset,” which states that the bank can freeze any
loan. If you negotiate a cure period, you can avoid this
;0 want an offset clause against your personal assets.
of your personal assets at a different bank.
Katz, Page 7 of 11
resumes, etc.)
uch easier. Build in the flexibility you need.
If the bank comes back and wants more, you
er, “What kind of rates are you going to give
me (or whatever the rate is) on this loan.”
second bank said they would be happy to give
rour banker asks why, say other banks have
t credit reports, so review them on a regular
It of date. Also, your trade creditors may say
it are way off base. You have the right to
t accurate.
Katz, Page 9 of 11
LEE KATZ
Lee Katz is a partner in the crisis management firm of
Grisanti, Galef, and Goldress. They serve companies in virtually
all industries, with revenues ranging from $5 million to $2 billion.
Katz has been a crisis management consultant since 1981. Prior to joining
GGG in 1987, he spent eight years in banking with The First National Bank of
Atlanta. His last position was vice president in charge of commercial lending.
This position also involved the restructuring/workout of many loans. Katz has
been president of dozens of companies, including those in petroleum blending,
clothing manufacturing, real estate development/management, reinsurance,
retail, camp/special events, and even the world’s largest cheerleading
/ uniform manufacturer. He has successfully brought several
companies through Chapter 11 proceedings.
Grisanti, Galef, & Goldress, Inc.
5435 Powers Overlook Court
Atlanta, GA 30327
(404) 952-1298 • (404) 952-1498 fax
TEC
5469 Kearny Villa Road, Suite 101, San Diego, CA 92123
(619) 627-4050 • (619) 627-0769 fax
2a.
The Profitmaker’s Top 10 Tools for MAXIMIZING CA$H
Proven In Practice by Over 500 Presidents
SHORE UP CAPITAL (both equity and debt) as you go — this
means leave equity in the company to grow so that borrowings may
grow as well without increasing the debt:equity ratio.
TRACK CASH DAILY so you can manage cash outflow (your
company’s expenses), cash input (payments received), and
borrowings appropriately. ,
RE-FORECAST CASH WEEKLY to get good at projecting cash
surpluses and shortages well in advance.
STAY CLOSE TO LENDERS & prospective INVESTORS long
before you need them!
Remember that GROWTH GOBBLES CASH so determine the
“right growth rate” for your company at its different stages of life.
/
Become a C-H-I-P-S searcher for life! It stands for Cash Hides in
Peculiar Spots. Turn over every stone as you walk the four corners
of your business daily.
BREAK THE CHECK-SIGNER’S ARM! And then sign the checks
yourself for a while; this will help you to REALLY understand where
your people are spending YOUR money.
HAVE AN “ALL HANDS” WEEKLY MEETING with everyone
in the business who has an impact on cash, incoming and outgoing.
REMEMBER — OWNING 40 OF A SUCCESS is far better than
owning 100 of a failure. Too many entrepreneurs have hung
onto “control” right into Chapters 11 and 7!
BECOME A CASH STUDENT, striving to understand the things
that have driven your company into paroxysms in the past. Read
Barry Schimel’s book” 100 Ways to Prosper in Today’ s Economy”
and David and Martin Sher’s book “Championship Collections”.
Top Casn
03/14/98
Copyright © 1996 Corporate Partners 1nc.
Kraig Kramers (770) 389-8511
|
Daily Cash Traclling and Forecasting Report |
||||||||||||||||||||||||
|
Actual |
Projected |
|||||||||||||||||||||||
|
Ch.ecks |
Mise |
ClHl1 |
Checb |
on |
LcllJ”l |
loan |
Checks |
Mis<:: |
Cum |
Checks |
om |
Loan |
Loar\ |
|||||||||||
|
Oates |
ReoelE!s |
Claar&d |
~um |
Nat Cash |
Net Cash |
WrfttGn |
Checb |
Advances |
8alanca |
RDcaiptS |
Cleared |
Adjusts |
He! Oash Net Cash |
Wr1tter. |
COOcks Motances |
a..hwce |
||||||||
|
1-Apr–S8 |
0 |
10,6~ |
-10,000 |
–626 |
713 |
0 |
49,668 |
-19,000 |
2;[J5(\,247 |
o |
1(],626 |
-10,000 |
~26 |
714 |
49,668 |
-19.000 2.060,247 |
||||||||
|
2-Apr–88 |
7,171 |
13.535 |
-13,026 |
6,002 |
7,375 |
47,591 |
83.724 |
10,000 |
2:070,247 |
7,171 |
13,535 |
-13.0~ |
6,662 |
7,375 |
47.591 |
83,725 |
10,000 2,070.247 |
|||||||
|
3–Apr–S8 |
177,181 |
-171.000 |
–S.181 |
1.193 |
200.951 |
107,494 |
13.000 |
2p83.247 |
177,181 -171.000 |
–6.181 |
1,194 |
200,551 |
107.495 |
13,000 2.083,247 |
||||||||||
|
4–Apr–S6 |
* |
0 |
o |
l,UI3 |
o 107,494 |
171,000 |
2.254,247 |
a |
0 |
1.194 |
0 |
107,495 |
171,000 2,254.247 |
|||||||||||
|
f>.Apr–sa |
* |
0 |
0 |
1.193 |
o 107,494 |
0 |
~4.247 |
0 |
0 |
1,19–4 |
0 |
107,495 |
o 2.254.247 |
|||||||||||
|
6–Apr–S6 |
27,914 |
–27,000 |
–814 |
279 |
4,451 |
84,031 |
0 |
2,254,247 |
27,914 |
–27,000 |
-~4 |
280 |
4,451 |
64,032 |
o 2,254,247 |
|||||||||
|
7-ApHl6 |
18,607 |
23,m |
-24,331 |
17,lEl |
17,640 |
3,335 |
63,588 |
27,000 |
2,2B1,247 |
16.807 |
23,m |
-24,331 |
17,361 |
17,S41 |
3,335 |
63,589 |
27.000 2.281,247 |
|||||||
|
8–Apr–BS |
35,120 |
28,580 |
-17,000 |
23,540 |
41,180 |
35,008 |
14,000 |
2,295.241 |
35,120 |
U.500 |
–17,000 |
23.540 |
41,181 |
0 |
35.009 |
14,000 2,295.247 |
||||||||
|
9–Apr–s8 |
10,524 |
22.000 |
–32.524 |
6,656 |
24,464 |
17,000 |
2.312,247 |
10.524 |
22.000 |
–32,524 |
8,657 |
0 |
24,485 |
17,000 2,312.241 |
||||||||||
|
10000r–sB |
14,900 |
-7,000 |
·7,900 |
756 |
9,584 |
-22,000 |
2,2S0,247 |
14.900 |
-7,000 |
-7,900 |
751 |
0 |
9.585 |
–22,000 2,290.247 |
||||||||||
|
l1-Ap~ • |
0 |
a |
756 |
0 |
9,584 |
7.000 |
2,2.97,247 |
0 |
0 |
757 |
0 |
&,585 |
7,000 2.2r:rT,247 |
|||||||||||
|
12–Apr-98 • |
0 |
0 |
75a |
0 |
9.584 |
0 |
2.2r:rT,247 |
0 |
0 |
757 |
0 |
9,585 |
o 2,“NT,247 |
|||||||||||
|
13–Apr–98 |
14,1“57 |
722 |
13,435 |
1~,191 |
28,3SS |
37,2’ST |
0 |
2:297 ,247 |
14.157 |
722 |
13.435 |
14,192 |
28,395 |
:rl,258 |
a 2,297:247 |
|||||||||
|
l.04–Apr-98 |
“”;324 |
2,259 |
10,300 |
31.675 |
45,867 |
2,834 |
37,&l2 |
0 |
2,297.247 |
44,324 |
2,259 |
10,300 |
31.675 |
45,661 |
2,834 |
37.833 |
o 2,297,247 |
|||||||
|
15–Apr–“ea |
0 |
8.:rl4 |
37,000 |
-15,374 |
.0493 |
0 |
29.459 |
-10,000 |
2,287,247 |
0 |
11,37.04 |
37.000 |
–45,374 |
4S4 |
0 |
29,459 |
–10,000 2,287.247 |
|||||||
|
16–Apr-96 |
66,837 |
15,434 |
-15,000 |
6&.500 |
66.996 |
0 |
14,025 |
–37.000 |
2,250.247 |
68,937 |
15.434 |
-15,000 |
66,503 |
sa,997 |
0 |
14.026 |
-37,000 2.250,247 |
|||||||
|
17-Apr-OO |
9,023 |
182,941 |
-114.000 |
-59,919 |
9,077 |
186,280 |
17,363 |
15,000 |
2,265.247 |
9,023 |
182,941 -114,000 |
–59.919 |
9,078 |
186.280 |
17,3184 |
15,000 2,265,247 |
||||||||
|
18–Apr~8 • |
a |
0 |
9,on |
0 |
17,363 |
114.000 |
2,379,247 |
0 |
0 |
9.078 |
0 |
17,364 |
114.000 2,379,247 |
|||||||||||
|
1S.Apr~8 • |
0 |
o |
9,077 |
o |
17.363 |
o |
2.~7g.247 |
o |
0 |
9,078 |
0 |
17,364 |
o 2,379,247 |
|||||||||||
|
20–Apr–98 |
69,656 |
a.zss |
0 |
61,390 |
70,467 |
40,107 |
49,204 |
0 |
2,379.241 |
69,658 |
8.266 |
G |
61,390 |
70,466 |
40,107 |
49,205 |
o 2.l79,247 |
|||||||
|
21-Apr~6 |
ess |
18,S40 |
42,000 |
–59.945 |
10.522 |
3,803 |
34,36S |
0 |
2,379.247 |
S95 |
18,640 |
42,000 |
–59.945 |
10,523 |
3.803 |
34.367 |
o 2,379.247 |
|||||||
|
22-Apr–S6 |
13,002 |
111.333 |
–S,OOO |
3,669 |
14,191 |
0 |
16,034 |
–42,000 |
2,337,247 |
13,002 |
16.333 |
–9,000 |
3.668 |
14.192 |
0 |
16.035 |
-42,000 2,337.247 |
|||||||
|
23-.Apr–96 |
6.720 |
4,769 |
8,000 |
-.4,069 |
10,122 |
51,585 |
62,330 |
9.000 |
2,346.247 |
8,nO |
4.789 |
6,000 |
-4,069 |
10,123 |
51,565 |
62.830 |
9.000 2.346,247 |
|||||||
|
24–Apr–s8 |
62.830 |
–8,000 |
2,138,247 |
115,000 |
10,000 115,000 |
-10,000 |
123 |
52,830 |
–8,000 2,338,247 |
|||||||||||||||
|
2f>.Apr–s8 • |
0 |
0 |
0 |
62,830 |
0 |
2,338,247 |
0 |
0 |
123 |
0 |
52.630 -115.000 2.223.247 |
|||||||||||||
|
26–Apr–sB • |
0 |
0 |
o |
62.830 |
G |
2,338,241 |
o |
0 |
123 |
0 |
52,83(} |
o 2,223.247 |
||||||||||||
|
27-.Apr–s8 |
62,830 |
0 |
2,338,247 |
8.000 |
18.{)00 |
-18,000 |
8,000 |
8,123 |
34,830 |
o 2,223,247 |
||||||||||||||
|
26–Apr–98 |
62,630 |
0 |
2,338.247 |
10,000 |
6,500 |
11.000 |
-7.500 |
623 |
28.330 |
18,000 2.241,247 |
||||||||||||||
|
2~Apr–98 |
62,630 |
a |
2.336.247 |
8,000 |
3,500 |
5,000 |
–600 |
123 |
24,830 |
-11,000 2,230,247 |
||||||||||||||
|
3a–Apr·98 |
62,630 |
0 |
2,338,247 |
100,000 |
5.000 |
85,000 |
0 |
123 |
50,000 |
69.830 |
-5.000 2.225,247 |
|||||||||||||
|
Apr. Totals |
287,611 |
500,795 -287,9f>l |
ses.ss: |
259,000 |
528,611 |
609,7S5 |
-79,967 |
619,331 |
146.000 |
|||||||||||||||
|
SS YTD Total; 1,757,545 2,261,513 |
–491,400 |
2.220,105 |
472.000 |
1,99S,545 2.860,213 -263.409 |
2,829,605 |
264,:000 |
||||||||||||||||||
|
IBorrowing Base Avaflable |
2.793,6791 |
|||||||||||||||||||||||
|
ILine of c:redit Available |
2,500,0001 |
|||||||||||||||||||||||
N
cr
4/24198 Dai\yCash •
TEe
AN INTERNATIONAL ORGANIZATION OF CEOs
RESOURCE PRESENTATION SUMMARY
-+-
/
CUS·TOMER FINANCING: THE Focus ON
PROFIT, NOT RISK
ABE SANCHEZ
INTRODUCTION
The traditional credit formula says that revenues minus expenses equals profits. With that
formula, you also get additional administrative expenses. Getting customer information,
checking it out, setting up the account, preparing and sending out invoices and statements, and
collection receivables all cost time and money. The more you drive up administrative expenses,
the more you drive down profits.
The second thing about credit business is you also create accounts receivables (AIR’s). This
asset goes on the right side of the balance sheet, but you can’t pay your employees, suppliers,
or vendors with it. They want cash. So you make an arrangement with the bank to borrow
money on your AIR’s, which drives up your debt service costs and drives down profits.
A third factor in extending credit is‘ the creation of potential for loss. Many very large
companies have gone bankrupt because they didn‘t take this factor seriously.
WHERE DOES CREDIT BELONG?
The three most common reasons for extending credit are:
• / It is required by your customers; if you don’t extend credit, you lose the sale.
Your customers are extending credit on their product or service and they need time to
sell the product and collect money to pay you. Again, if you don’t extend credit, you
lose the sale.
• The competition is doing it.
The only reason credit exists is to sell a product or service. Contrary to the traditional mindset,
credit is not the ability or willingness to pay. Those are factors to be considered when extending
credit, but they aren’t credit. Credit is selling a product or service based on payment at a
later date. If you do something for a customer and they don’t pay you immediately, you have
just gone into the credit business.
The problem with most organizations that extend credit is they place it in the accounting
department. Yet, if credit is a sales support function, why place it in accounting? Accounting
does have the responsibility of safeguarding the assets of the business. And in many companies,
there is more money in AIR’s than any other asset. So accounting does need to know what is
going on, but they should not run the credit function.
Even though credit is a sales support function, the sales department is not the proper place for
it. Sales people are focused on making sales; they aren’t thorough enough to protect the best
TEC
Sanchez, Page 1 of 12
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interests of the company. They tend to offer credit to anybody willing to buy, regardless of the
risk. In addition, good salespeople have a strong need to be liked; they just aren’t equipped to
handle the credit function.
The solution is to place credit between accounting/finance and sales and call it the customer/sales
support department. Within this new department are customer service, credit approval, and
collections, and their job is to bridge the gap between sales and accounting. This department
reports to accounting but also works to support sales.
Credit should be used to make money, to maximize your profits. Most companies don’t
understand that. Creating a customer/sales support department will support that goal.
CREDIT MODEL
Credit is a process that follows a structured series of steps:
Set-up: Start with a mission statement that defines credit as a sales support function.
Set up your credit for sales approval. That should be the #1 priority. Your credit
application represents a pending sale. If it takes 2–3 weeks to process an application,
you’re telling the customer you can’t help them for 2-3 weeks. In this era of instant
gratification, you will lose that customer.
In credit approval, your goal should be to maximize sales and minimize risk. Most
companies focus only on minimizing risk. The two most common measurements of
credit collection are “days sales outstanding” and “bad debt write–off” ratios. These are
accounting formulas, but they are used to measure the credit function. They set you up
to look for ways to say no to the customer.
The traditional mindset is that all bad debt is bad. That’s not true. Bad debt is just
another cost of doing business. The only thing that counts is bottom line profits. It’s
possible to have too little bad debt write-offs. If you’re focusing only on minimizing
risk, you’re losing too many sales.
Billing: Once you say yes to a customer, the next thing that happens is billing. If you
don’t send a bill, people won’t send you money. The goal in billing is to facilitate
payment, and the credit approval process has a real impact on the billing process.
Use the TACU approach to billing:
• Timely
• Accurate
TEC
Sanchez, Page 2 of 12
• Complete
• Understandable
Accuracy is very important. Mistakes delay payment and cause customers to badmouth
you to others. When mistakes occur, the customer normally doesn’t call you up to tell
you about it. Instead, they put the bill in the “problem” pile where it sits and sits.
Mistakes tell the customer you don’t know what you‘re doing.
Collections: On average, 25 of all AIR’s are delinquent. Yet, less than 1 get
written off as a bad debt loss. That means delinquent customers are good. They will
pay but there are reasons why they aren’t paying now. Remember that you’re dealing
with customers, not debtors. It makes a big difference in how you approach the
collections process.
The first goal with collections is to complete the sale. You want to get paid. If you
allow customers to become delinquent, you cheat yourself out of repeat sales. If a
customer is delinquent with you but not a competitor, they will go to the competitor for
the next purchase. If that continues, you end up at the bottom of their payables list.
The second part of collections is identifying the small percentage of customers that
represent a potential for loss. If you ask the right questions, they will tell you they are
risky. The key is to identify risky customers before they run up large debt. One huge
–bad debt write–off can wipe out a lot of profits. So while you don’t want to limit sales,
you do want to establish a triggering mechanism that tells you when it is time to bump
the customer into a riskier category.
The second goal of collections is to keep customers current. If you keep them current,
they keep buying from you. If you allow them to become delinquent, they will go to the
competition. If you cut your average turn time on AIR’s, make sure your salespeople
don’t slack off.
Internal communications: In most companies, if anything goes wrong credit gets to
clean it up. The good thing about that is you learn a lot about what is going on in the
company. You quickly find out who is messing up on a regular basis. You also learn
a lot about your customers’ companies. Look at internal communications as a feedback
loop.
Performance measurement: You must track how well you manage this asset. It isn’t
necessary to extend credit to every customer. If somebody wants to pay cash, take the
check! The right time to extend credit is when you have to do it to make the sale.
Credit is the selling of a product; collections is completion of the sale.
TEC Sanchez, Page 3 of 12
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MAXIMIZING SALES WHILE MINIMIZING RISK
The credit approval process typically starts out by getting information on an application form.
The problem with application forms is most customers don’t want to take the time to fill them
out. The solution is to have your salespeople gather the information. Since they normally have
first contact with the customer, they can gather all the information you need right off the bat.
That way you don’t have to go back and bother the customer. (This may take reeducation of
your sales force.)
In their first contact, salespeople should ask how the customer intends to pay for it. That
question naturally leads to getting information needed to set up terms if the customer wants
credit. With this process, the customer never has to fill out the application.
You need three factors for credit approval:
Profile: Who the customer is and how they do business. You want to know who they
are, where they are, how long they have been in business; all the information that helps
you put together a snapshot of the business and assess the risk. You also have to know
how they do business. Find out specifically who to send the invoice to and whether they
have special billing instructions.
Past performance: How people have conducted themselves in the past is a good
indication of their future behavior. Ask who they have done business with and then ~
check them out.
Product value: This breaks down into two areas: demand for and the margin on your
product. If demand and margin are high, you can afford to write off more bad debt.
If margins are big enough, they can often offset the profile and past performance.
There are many ways to say yes to the customer. Credit approval comes down to finding a way
to say yes. When you reject a customer you build up ill will because the customer loses face.
Look for ways to say yes while remaining confident of payment.
Up to this point, if your salespeople are getting all the information, you haven’t asked the
customer to fill out anything. You still need to get them to sign on the dotted line, and you need
to formally define the terms and conditions of sales. The account confirmation letter is a good
tool for formalizing the credit.
The account confirmation letter says, “Thank you for doing business with us, here’s how we do
business, please sign at the bottom, keep a copy, and return the original to us.” It should not
be standardized. Change the letter to suit the customer’s needs. It is legal to offer different
terms to different customers based on your perceived potential risk.
TEC
Sanchez, Page 4 of 12
FRANK & BRESLOW, P.C. Educating Clients to Avoid Employment Letigation