» Posts tagged ‘Financing’

Rising Sales are great, right? Read this first

Resurgent Growth easily overtakes Cash Flow!

“If the people knew how hard I had to work to gain my mastery, it wouldn’t seem wonderful at all.”     – Michelangelo

These days, one of the things I hear most often in my conversations with CEOs is their confidence that growing revenue and reduced expenses is all that’s needed to restore performance and financial stability. That’s the simple cure to overcome the travails of the last 18 months. “If we can just get back some of the sales we’ve lost and hold down our expenses, we’ll be profitable again and have the cash flow necessary to resume normal operations.”

Financial resources to fuel growth are the lowest in years

Unfortunately, that scenario is unlikely to unfold as scripted. As a result of depleted profits and depressed cash flow incurred over the last 18 months, the financial resources to support revenue growth are at the lowest level in years.

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I wish had the time to write about all that’s on my mind about the SEC charges vs. Goldman. The crux of my most recent post was that institutional investors – not individual investors – have few excuses for making unsuccessful investment decisions except their own lack of due diligence or the fact that what they thought was a good decision … wasn’t.

I’m happy to see that Warren Buffett agrees as he told his rapt audience in his comments at Berkshire Hathaway’s recent annual shareholder’s meeting. Of one firm, ABN Amro, Mr. Buffett said: “It’s hard for me to get terribly sympathetic when a bank makes a dumb credit bet.”

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Does EBITDA really tell you what you need to know?

“I have enough money to last me the rest of my life … unless I buy something.”–         Jackie Mason

Does this sound like you?

Someone recently told me that they’re bored by finance. “Don’t distract me with strategic finance stuff, just let me run my business the way I know how.”

“No problem,” I said, “if you’ll just answer one question. What if the way you’re running it is causing increasing strain on your financial resources, cash flow is dwindling and you’re destroying market value every year. Do you care about any of that?”

“Of course, I do, but when sales start picking up again, all of that will go away and my EBITDA will return to normal levels.”

“Really?” I said. “How do you know that?”

“That’s the way it’s always worked.”

“Have you had any problems with your banking relationship?”

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Will Rogers was fond of saying, “Buy low, sell high … and if it doesn’t go up, don’t buy it!”

That’s a whimsical sentiment, but I wonder what’s in the air when I read about the alleged fraud by Goldman Sachs described in the civil complaint filed by the SEC, referenced in the recent article here. I wouldn’t jump to conclusions too quickly. In too many ways, this episode is reminiscent of earlier 1980s  battles with Michael Milken. Notwithstanding Milken’s misdeeds, my vivid memory is that there were accredited investors and savvy buyers on both sides of those transactions perfectly capable of making independent decisions. Some of them were wrong and they lost money, but in virtually every case, they were well-equipped to make sound decisions … if they did their homework.

These challenges typically arise when people lose money … and there’s no question a lot has been lost. But, to assume that people who lose on one side of a transaction, are incapable of making prudent independent decisions and were sold a bill of goods , is the flawed argument that often pervade these matters.

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“If I am through learning, I am through.”– John Wooden

Some of you will remember – back in the day – the E. F. Hutton commercials that intoned, “When E.F. Hutton speaks, people listen.” (Some of you are probably wondering – who is E.F. Hutton in the first place?) These days, the Sage of Omaha has taken their place and has the ear of many. When I finished re-reading Warren Buffett’s Annual Letter to Shareholders, it resonated with similar messages in a number of recent articles.

What is growth?

From a Wall Street Journal article on March 25 discussing Conoco/Phillips’ future plans: “We asked ourselves, ‘What is growth?’” an executive said. “Growth could be viewed as just growing absolute volumes, but we felt that in this challenging environment what’s really important is to grow the value of the company.”

Or this one, from an article in the April 5 edition of Business Week about the Sears/K-Mart merger: “Simplistic analyses … ignore the fact that negative or below-market returns on invested capital are as harmful to creditors as to shareholders.”

Finally, in Warren Buffett’s shareholder letter,

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You’ll recall my recent post about the anticipated changes and expansion of small business lending. Now it’s possible that two of the  stimulus programs may expire … BEFORE any new ones take their place. This includes the most popular provisions that allowed the SBA to drop their fees and to raise the maximum guarantee to 90%. Moreover, when the stimulus funding is depleted, the guarantees will fall back to 75%  on loans of more than $150,000. Stay tuned to see if the much needed financing assistance expected from the SBA gets the support it deserves.

As if there aren’t enough problems qualifying for SBA programs, there’s one more maddening thing with which to contend … the myriad definitions of “small business”. If you’re interested … and  can grapple with some of the minutia … you can read more about those crazy definitions here.

The other day we learned of renewed efforts promised by the Obama Administration to stimulate small business.

This week, they announced some plans to sweeten guaranteed loan programs. The administration is allowing a few weeks for comments before finalizing these details.

1. The SBA will raise loan limits from $2m to $5M
2. Local banks can get 3% interest rates in they demonstrate how they’ll use TARP funds for small business, a reduction from the 5% big banks usually pay.

There is not a lot enthusiasm for this program among banks, however, as many of them report that the paperwork is overwhelming and that few small businesses are seeking loans. Some banks are also concerned about the “strings attached” and don’t want to be tainted by any hint of federal bailout money.

Tomorrow, the Obama Administration is scheduled to announce new initiatives to spur small business lending. Among the initiatives are increasing limits for SBA loan and make it easier for smaller banks to access TARP money.

As we know, the SBA estimates that small business creates 60-80% of new jobs. So, if job creation is number one, access to capital and business building ideas are crucial for small business.

Stay tuned for details.

Despite all the recent publicity about the SBA’s “helping hand” to small business, recent reports tell another story. Loan volume in dollars is down $3.6 billion, around 27%, and 25,000 fewer businesses have been served this year. Pretty woeful record when programs to support Wall St. and the banking industry got delivered virtually overnight … and at least HALF of this nation’s jobs are in small businesses.

Seems a lot like the stimulus package hyped earlier this year … more smoke than fire, too much bureaucracy, slow execution …. Another frayed lifeline for small businesses which are the backbone of job recovery.