Overview: A national services organization had experienced significant volume growth over a number of years. Accrual method profits were substantial, yet the company struggled to secure and grow its credit facilities due to a complex economic model and a business to consumer business model. Banks cautiously eyed the company’s significant consumer receivable asset as a potential collateral source.
Analysis: Financial institutions are equipped to deal with standard industries and business models. This business was unique in its complexity of accounting and an industry not frequently encountered in Colorado. Based on discussions with a number of prospective lenders it became obvious that the company had struggled explaining the merits of its business and, more importantly, had been unable to accurately model its business in a format the lenders were comfortable analyzing.
Extreme care was required to not only forecast Cash Flows, as well as Income Statements and Balance Sheets, but to also document the key business relationships and financial assumptions underpinning the forecasted financials.
Finally, the company experienced a significant distortion of it operational results through the use of the accrual basis of accounting. While the accrual method is required by GAAP, the more meaningful measure of cash basis allowed the company’s management to accurately interpret the effects of key decisions.
Result: The company has increased its credit facility four-fold over the last three years. As credit is considered a significant determinant of future growth, the company is now continuously in contact with financial institutions that may be of future assistance. The business continues to grow in comparison to its peer group, and as a result has increased its market share and strategic importance within its industry. The company also maintains an active business planning effort that focuses on cash flows, growth, and service additions to its revenue and profit streams.