Interview with Tim Anglim
Interviewer: Andrew Zezas, SIOR
Following is the transcript of a CFO Studio interview between Andrew Zezas, CEO of New Jersey based Real Estate Strategies Corporation and financial executive, Tim Anglim, President of YesCFO & CPA Forensics.
Visit www.CFOstudio.com to read about this interview and to watch the entire video interview.
Economy and Banking
Zezas: Hi, this is Andrew Zezas, President and CEO of New Jersey based Real Estate Strategies Corporation, coming to you today as part of our CFO interview series. Today, we have the pleasure of interviewing Tim Anglim. Tim is President of YesCFO & CPA Forensics. Tim, thanks for being with us.
Anglim: Andy, thank you.
Zezas: It’s a pleasure to have you. Tim, we have some really wild and interesting stuff going in the economy today. So, I wanted to jump right in with some questions about your views as to where things are going. My first question has to do with companies and banking. Has the economic situation in which we currently find ourselves in, what we’ve been experiencing, adversely impacted companies’ abilities to secure bank financing?
Anglim: Yes, and it will continue into the foreseeable future. Take TARP for instance, the government’s program to help support lending in the banking community, just a few years ago banks got into that program as a way to create a backup or a reserve to their ability to raise funds. And, as they approached what they thought was an abyss in the credit crisis, in the credit markets, they saw this as a way to shore up bank balance sheets. Unfortunately, subsequent to banks going into these agreements, the regulators came out to put in some very tight controls and got into the management of the banks themselves. So, almost every bank has tried to, or is in the process of, paying back those funds. Unfortunately, paying back those funds now is just when you need to keep that cash on the balance sheet of a bank. It has to come out of somewhere and it’s going to reduce reserves, reduce the ability of banks to continue lending and so it’s going to create a little more of a slow down effect for a while.
Zezas: Interesting, thanks. Minimizing reserves doesn’t sound like a very good thing.
Anglim: Increasing cash reserves and minimizing the cash balances out there.
Zezas: Let’s talk about companies and capital spending. Is it fair to assume, well not fair to assume, but will companies be increasing or decreasing capital spending in 2010 over 2009?
Anglim: Probably increasing. There are three types of capital spending that most financial folks lump that category of spending into. There’s the basic maintenance, or if you will, replacement course capital spending. There’s capital spending for growth opportunities, and there’s capital spending for reduction of cost or efficiency improvements. The last two categories are discretionary to a certain degree, so they tend to suffer. As the economy does pick up at some point, that discretionary part will start to pick up as well. So yeah, I would expect that in 2010 you would see somewhat of an increase over 2009, but it depends.
Zezas: And, you’re expecting marginal increases.
Anglim: I think it depends on the industry. I mean, you can take a government contract that may not have seen any fall in business because they’re funding a war effort or they’re involved in research and development that is critical to the government, or the space industry as opposed to a consumer products company, which has completely fallen off a cliff last year.
Zezas: Right, right. Interesting dynamic. We talked a little bit about financing by companies. Let’s talk about bank financing agreements. Have agreements themselves been affected by the current economic circumstance in which we find ourselves?
Anglim: Yes. It’s tougher to get to a “yes” in an agreement, to get a commitment from a bank to begin with. Additionally, when you do get such an agreement, it comes at greater cost. It will be laid with more fees. The banks are pressured by artificially low-interest rates. Consequently, they’re trying to improve their profit margins through other means and agreements. Additionally, you have controls from the regulatory side of the picture that have created a lot of second guessing. Traditionally, in any company, whether it’s banking or anything else, you always have the credit issue- the creditworthiness of a customer. Well, the banks are no different. They have credit departments. They look at the business sense of the deal and today they’re second guessing things, or they’re being more scrutinizing, in how they approach things. They’re trying to cover their collective risks. They may turn down deals they have done in prior years or if they do a deal today, it has more stringent covenants and it comes with costlier fees and other structures.
Zezas: In some types of real estate lending, for example, we’re seeing banks be very strict in the nature of their agreements and the structure of their agreements. We’re seeing substantial recourse requirements. We’re seeing drastically reduced loan to value ratios. In most cases, in order for a bank to consider lending we’re finding that they’re requiring the borrower to maintain substantial accounts, other accounts, with the banks so they have collateral and a multi-faceted relationship. Are you seeing that as well?
Anglim: Yes, additionally where personal guarantees would not be the norm, when a company normally has enough cash flow or enough asset strength, today those personal guarantees, particularly in private held companies, are being required by the credit folks at the banks.
Zezas: Yeah, it’s amazing. It makes banking relationships and borrowing challenging, to say the least.
Anglim: There’s an old sore that banks lend money when you don’t need it. To a large degree that’s true. Of course, you need it to grow and of course you’re trying to finance a number of things that you’re doing that breach your flexibility, but you have to be able to survive without the banking agreement before you can obtain financing today. Unless you’re going to the more asset-based approach or you’re going into venture capital.
Zezas: Let’s shift gears a little bit. Let’s talk about companies and customers. Today, given where we are, what steps are companies taking when working with their customers to make sure their customers continue to buy, but at the same time making sure they’re paying their bills in a timely manner?
Anglim: There’s always a conflict between paying customers and slow paying customers. But often times slow payments are better than no payments. You have to find a way in economic times like this to make sure you balance the needs of your customers with your own need to have a paying customer and a profitable customer. It’s important to get into the understanding of what’s going on when a customer starts to drag payment. Communicate with that customer. Try to understand if it’s their financial strength or if it’s short term or long-term in nature or is it something structural to the industry that they’re serving. Make sure that you don’t get trapped into that situation where customers bounce vendors off of vendors. For instance, if somebody owes you money for 90 to 120 days, they’re not going to call you to replace that order as they normally would because they know you’re going to want payment. So they go to vendor b and vendor c and so on and so forth. When it’s your turn to receive an order, typically, they’re willing to replace that invoice with a new order for the old invoice. So, by communicating with them, perhaps you can become part of their ongoing sales turnover and by negotiating either a payment plan or an agreement about how the deal with the old issues at the same time nurturing a great customer. It can do two things. It creates some vendor customer loyalty, and it also keeps you from failing and losing business.
Zezas: So, the name of the game is communication, customer service, and not just waiting for payment, but being actively involved.
Anglim: And ask questions.
Zezas: And ask a lot of questions. Yea, that makes a lot of sense.
Anglim: Yea, it’s kind of funny. Like the man of jeopardy, ask questions.
Zezas: Tim, what have you found more troublesome, revenue weakness or expense management? And, how are companies that you are familiar with dealing with both of those?
Anglim: Interesting, in turnarounds, the holy grail in turning a company around always is how you grow the company. Also, when companies find themselves in a downturn, typically, they try and buy their way out by increasing the top line the sales line, but sometimes that comes at great cost. So, although you have to go into an organization or in to a situation with a turnaround and you do this as an internal team or as an external consultant coming in, you still have to go through the same process. Address which customers do you make money from, how much, and which customers do you not. Oftentimes, the customers that you do not make money on, you’re better off dropping now rather than trying to hold on and subsidize until a better day comes. At the same time, you have to focus on the bottom line. You should go after cost using the 80/20 rule. Start at the top with the big items and end with the small ones at the end, but in doing so, rationalizing the entire process. Cash is king. You’ve got to identify it, hoard it, save it, and line up resources for further growth.
Zezas: Tim, we’re running out of time. I thought they were superb answers. We could spend an hour or two more about this stuff, but I want to thank you for being here today on CFO interview series. This is Andrew Zezas with Real Estate Strategies Corporation, as part of our CFO video interview series, saying thank you very much for watching today and we’ll see you soon.
Anglim: Thank you, Andy.
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