Art of Accounting: The Background to Saving a Business
IMGCAP(1)]It’s important to get an up-close look at a client’s business in order to save it.
In my previous two columns I wrote about how I rescued a business that was in danger of closing because of unpaid taxes (see Art of Accounting: To Save a Business, Plan the Details and Art of Accounting: Saving a Business). After writing those two columns, I thought about some additional details that should be shared with readers, so here goes.
The monthly financials presented by the client to the bank were simply not right; the inventory was fudged to show a profit. The controller did what he thought he needed to do to help his employer, but actually he was doing his boss a serious disservice. At the same time, the bankers who reviewed the information had to be grossly incompetent, if they paid any attention to it, and if they did not review it, then they were negligent in performing their job.
My simple spreadsheet quickly showed that inventory could not have increased. A company in trouble does not build inventory; it buys what it needs in order to ship product. The banker also did not look at the cash flow. A simple indication of losses is when cash going out is greater than what is coming in.
The company had inventory on its shelves reaching the ceiling. A quick look during an initial tour of the business showed layers of dust, which is a sign of old at best—and obsolete at worst—inventory. My tour also showed a viable operating business, with people working hard, a clean work environment (except for the old inventory), current purchases going into production as quickly as the manufacturing process allowed, and no one standing around waiting for anything. The owner and controller knew everyone by name. The company was a manufacturer, but it used minimal machinery and highly skilled labor, so it wasn’t greatly capital intensive. The shipping area was not backlogged, nor did the production floor seem to have any bottlenecks. However, there was a lot of unused space and excess capacity.
I’m an accountant, so what do I know, but what I saw was impressive. When I went on a second tour of the business with the lawyers, I came up with some ideas, including that 80 people depended on this business for their livelihoods. That is a serious responsibility and was the primary reason to save the business, and one that the IRS revenue officer understood and was a major concern for his cooperation in giving me time to put my plan in action.
The distance was not a hindrance since I had cooperative people who reported accurately and who responded to what had to be done. Except for the lawyers and banker, everyone performed beautifully which made my job easier and more effective.
I also had a client who had very realistic expectations. She was prepared to lose everything but did not want to be in continuing debt. When that happens, I can push the envelope as far as necessary since I cannot make it worse. The harder job for me is when the client doesn’t want to lose everything, though that is the probable outcome. Then, I cannot push as hard as I need to because any “act of war” by me that will put the client in a worse off position if it doesn’t succeed has to be held off.
I define an act of war as an action or threat that will hurt the other side more than us if resisted. However, we will be hurt irrevocably if it is not accepted. Some examples are to stop making principal and interest payments on a bank loan, or to pay the landlord much less than the monthly rent, or to not pay a supplier enough to cover the current shipment. When I have nothing to lose, and I do not have cooperative adversaries, I can take unilateral action trying to force them to accept my more “reasonable” proposals.
For about a year and a half after the plan took effect, I met once a month with the management team and their attorney, sort of like an informal board of directors. At some point the company was functioning smoothly, and my meetings stopped and then eventually my calls.
Needless to say, this was a very satisfying assignment. And who says accounting is boring?
Edward Mendlowitz, CPA, is a partner in WithumSmith+Brown, PC, CPAs. He has authored 20 books and has written hundreds of articles for business and professional journals and newsletters plus a Tax Loophole article for every issue of TaxHotline for 27 years. Ed also writes a blog twice a week that addresses issues his clients have at www.partners-network.com. He is the winner of the Lawler Award for the best article published during 2001 in the Journal of Accountancy. He has also taught in the MBA graduate program at Fairleigh Dickinson University, and is admitted to practice before the U.S. Tax Court. Ed welcomes practice management questions and he can be reached at WithumSmith+Brown, One Spring Street, New Brunswick, NJ 08901, (732) 964-9329, firstname.lastname@example.org.