Interview with Mark Mishler
Interviewer: Andrew Zezas, SIOR
Following is the transcript of a CFO Studio video between Andrew Zezas, CEO of New Jersey based Real Estate Strategies Corporation and finance executive, Mark Mishler, CPA, CMA, Public Company CFO and Adjunct Finance Professor.
Visit www.CFOstudio.com to read about this interview and to watch the entire video interview.
Current Accounting Regulatory Environment
Zezas: Hi, this is Andrew Zezas, your host at CFO Studio. I have the pleasure of sitting here today with Mark Mishler, Public Company CFO and Adjunct Finance Professor. Mark, it’s nice to have you here on CFO Studio.
Mishler: Andy, it’s good to be here, thank you.
Zezas: Mark, we know that the world has been interesting in the last few years, and I wanted to ask you about financing covenants and bank financing agreements. How have those agreements been affected by what’s going on in the current accounting regulatory environment?
Mishler: What’s really critical today Andy, are debt covenants and debt covenant compliance. One of the big changes that’s going to happen with FASB are that traditional operating leases are now going to go on the balance sheet as capitalization, and that’s especially important where you have building rent that is now going to become a liability. Debt covenants could really end up having an impact unless you employ something called frozen GAAP when you enter into a new agreement.
Zezas: I’ve never heard that term. Frozen GAAP you said? What’s frozen GAAP?
Mishler: Frozen GAAP, meaning that the debt covenants will be calculated based on the accounting principles that exist at the time of the agreements signed, not as they evolve over time.
Zezas: Ok. During the term of the agreement between company and bank, basically both parties are agreeing to freeze GAAP, and utilize that method of calculation and covenant determination during the entire arrangement?
Mishler: That’s right.
Zezas: Irrespective of changes and lease accounting.
Mishler: That’s correct.
Zezas: Ok, that makes a lot of sense. That’s impactful. I don’t think I’ve ever heard that term before. So, we talked about covenants, let’s talk about cash flow. In the current economic environment, in regards to cash flow, are companies having a good time or bad time? How are they faring?
Mishler: Well, cash is always important. But, in this economy, it’s especially important in managing working capital. We have taken our accounts receivable down from 110 to 70 days, just by paying very careful attention to when we’re getting paid. At the same time, we’ve increased our payable days from 30 into the 50s, and that’s important for preserving cash and working capital in this environment.
Zezas: And, are most companies still handling cash flow the same way given that the economy seems to be getting some traction at this point?
Mishler: I believe that a lot of companies are because, not only are we doing this ourselves, but within our supply chain we see the same thing going on.
Zezas: Ok, I got it. So, let’s stay with the issue of cash flow, but specific to revenue. What do you find more troublesome, revenue weakness or expense management? And, share with me, maybe your company or how other companies might be remedying those challenges in the current environment?
Mishler: From our perspective, anyone can cut costs. True performances, can you increase revenues? That’s the real- what the world class companies today are focusing in on for increasing their revenue. At our company, our management team is spending more time, actually with customers and doing what we can to increase customer service so we can grow our top line. And, we are seeing results in that.
Zezas: That’s wild, that’s interesting. So, while companies are focusing on revenue, expense management, and cash flow, cash being king, how are companies looking internally? What are companies looking to do or what are they doing? What is your company doing to improve financial department efficiencies?
Mishler: We’re employing lean and lean concepts. Lean has been around for a number of years, generally focused on manufacturing. We’re looking at Lean to focus, or we’re using Lean office to focus on how we can improve our internal office operations, our back office operations. We create a value stream for how we can add value to our internal customers, and how finance can partner with operations, marketing, & engineering to increase value and improve internal customer service.
Zezas: Internal customer service. So, I think what I’m hearing is that it is both an inter-departmental and an intra-company approach to finding operating and financial efficiencies.
Mishler: Exactly, Andy. It does both. And, not only with improving efficiencies in turnaround time, but it also takes out waste and that means it reduces cost.
Zezas: How do you measure something like Lean office?
Mishler: It’s important that you benchmark what our customers want and what industry best practices are. And by benchmarking, then we continuously monitor our progress and look at continuous improvement. So, as we make incremental improvements, we go that next step and try to improve even more.
Zezas: And, when you say benchmark for customers, I think I understand you to mean not just your external customers, but your internal customers.
Mishler: Exactly, we benchmark both. External customers for customer service, internal customers for internal customer service.
Zezas: And performance.
Mishler: And performance, yes.
Zezas: That’s great. That’s very exciting. Let’s go global. Let’s talk about the U.S. dollar. We all know it’s in a funky place these days. How has the valuation of the dollar been affecting U.S. companies and their ability to do business on a global scale?
Mishler: I’m managing 40 plants in 30 countries.
Zezas: 40 in 30 countries. Wow!
Mishler: So, we have a lot of currency issues to work with. What most people think of is, yes, the dollar devaluing means it’s easier to sell our goods overseas. With a global supply chain, that means our raw material purchases are going up in cost, and that’s where it’s not all good news. What we have done is, we have put in natural hedges for managing our currency exposure. So, if we have net exposure in Euros because we’ve been selling in Europe, then we want to, throughout the world, be buying more in Euros such that we have a natural offset in our accounts receivable and accounts payable in currency.
Zezas: And are other companies, who are actually doing business across country borders, are they managing the companies the same way?
Mishler: Actually, most companies just look to hedge their currency exposure externally. I find that the natural hedge is much more efficient and cost effective.
Zezas: It makes perfect sense. Mark, let me ask you one last question. There are a lot of CFOs out there who are listening to this interview and scratching their heads whether they’re global, domestic, or large-cap or mid-cap. If I ask you to give guidance to your peers, as to the single most important focus that they should be focusing on over the next couple years as finance executives, how would you respond to that question?
Mishler: We’ve always heard the expression that cash is king, but it’s even more important right now because of the economic uncertainty. But, financing is much more difficult and obtaining financing, for many companies, has been impossible. So, in managing cash today, it really helps prepare the company for the future, and helps you meet current operating needs.
Zezas: Cash is king.
Mishler: Cash is king.
Zezas: Mark, this has been great. I hope you’ll come back to CFO Studio. I really appreciate you spending your time and sharing your thoughts with us.
Mishler: Andy, thank you. It was fun being here.
Zezas: Thank you. This is Andrew Zezas with Mark Mishler, saying thank you for watching CFO Studio. We’ll see you again real soon.
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