As we begin the second quarter of 2010, how are you doing on your New Year’s resolutions for your business?
To help you take stock, we are writing a series of columns to check back on resolutions we proposed in our January column, “New Year’s Resolutions for Foodservice Distributor Owners” (http://www.ksadvisorsllc.com/finance_report.htm). We all know how easily New Year’s resolutions slide. This multi-column blueprint will help you measure your progress towards transforming your business model with a fresh perspective on your business as an investment.
Our list of resolutions for distributor owners for 2010 were designed to help you capitalize on opportunities, and to protect and grow your market share. They included:
- Leadership and Staffing
- Marketing and Sales
- Understanding Your End Game
In today’s column, we will discuss how to begin to gain traction on your finance objectives for 2010. The finance resolution we recommend that every one of our clients make, whether they are expanding their business, making their business more profitable, driving their business from shaky ground to a firm footing or planning to sell their business is:
I will RESOLVE to deepen my understanding of the financial aspects of my business, to identify financial opportunities and risks, and to work with my advisors and lenders to use capital wisely.
Sound financial leadership requires you to:
- Clarify the value of assets you own, including the value of your operating company and the value of your facilities and real estate.
- Have you had a recent appraisal of your business real estate? This tool will give you a better read on the amount of insurance you should be carrying as well as exposing any hidden borrowing power available to you in the property. It will also provide a benchmark in the event someone offers to purchase your property.
- Do you know what your operating company is worth? There are standard measurements based on multiples of earnings, adjusted for customer quality, organizational stability and debt levels. It is extremely important to have a range of realistic values for business and estate planning purposes. Again, this knowledge will give you a benchmark to evaluate any purchase offer that may come to you.
- Measure the operating performance of your company against standard industry benchmarks.
- How do your earnings ratios (EBIT, NIBT, EBITDA, and ROIC ratios) compare against readily available data from public foodservice distributors and against some private data for companies of your size and make up (available through IFDA and other sources)?
- How does the return on your capital compare against some alternate uses of that capital? This can be a fairly complex, sophisticated measurement that you may want to get some help with.
- Do you have a system to account for inflation/deflation when comparing different years? We all know that sales information can become distorted with large price swings, particularly if you are involved more heavily in commodity types of products. You can also get a better picture by measuring unit and tonnage movement statistics.
- Measure the use of operating assets within your company. Determine if they are generating the returns you should expect and whether they are properly protected and insured.
- Do you have a clear idea as to whether you have the appropriate levels of inventory and accounts receivable? Do you have a system to measure the return on these investments?
- Are your fixed assets appropriate for your business – today and in the near future? This analysis would include truck fleets, warehouse equipment and IT investments.
- Are ALL of your assets insured at proper levels? Have you considered credit insurance on your AR? Does your building insurance provide for replacement cost coverage, rather than historical cost coverage? Does your policy cover business interruption expenses? If not, how long would you be able to stay in business if you could not ship due to a fire, flood, tornado or hurricane?
- Measure the cash flow generation (as opposed to the book profit) of your company.
- Some businesses are cash generation machines because the management team has the policies and the discipline to produce operating earnings, control working capital, and invest shrewdly on capital expenditures. Other businesses “fly by the seat of their pants.” Which description fits your operation?
- Our experience is that very few independent distributors have the discipline to carefully measure their real cash flows, and even fewer have the discipline to plan their sources and uses of cash. Lenders are very interested in this topic.
- Evaluate the use of debt in your business including working capital lines of credit, term bank debt and private debt.
- Is your balance sheet over-leveraged? Your lender has several measurements to evaluate this aspect of your business and you should understand the measurements as well as your lender. Typically, these measurements include debt-to-equity, interest coverage and other ratios.
- Is your balance sheet under-leveraged? Some distributors would be wise to get excess capital off their balance sheet. There are several ways to check this. You should have good accounting and tax advice to fully appreciate this area.
Getting your management team to “think like owners” requires that you have the skills to evaluate your business like a banker. While every company leader has a different level of financial skill and understanding, each has the opportunity to improve his or her financial acumen by studying the facts, analyzing the outcomes, and consulting with experts. As your financial understanding increases, you will be better equipped to make strategic decisions for the logical next steps for your business.
Helping distributor owners think like financial strategists instead of managers is our sweet spot. If you would like a copy of our IFDA presentation on distributor owners becoming financial experts, please email me at email@example.com.
We encourage you to use this series of resolution check up columns to dig deeper within your business and to prepare for the future strategically. Please call us for a confidential conversation at any time to help make the most of your business today and tomorrow.
Bill Beattie, Managing Director, Keiter Stephens Advisors
Keiter Stephens Advisors is the foodservice distribution finance and consulting subsidiary of Keiter, Stephens, Hurst, Gary & Shreaves. They have worked with over 50 foodservice distributors across the country. KSA services include:
- Mergers and Acquisitions: guiding the sales and acquisitions of foodservice distributorships and regional sales territories
- Profitability Improvement on both the vendor and customer sides
- Strategic Services, including transition planning for family-owned distributors and driving management consensus with KSA’s 3-1-1 Planning Process
- Finance Solutions, including finance strategy development, distribution center expansion analysis, lease or buy decisions on real estate and equipment, and cost segregation studies.