Imagine you are a $6-MM gross profit Metal Fabricator and Commercial Cooler Service company that serves the Gas & Oil industry. Your Financial Statements state that you have made $665,000.00 Net Profit year-to-date at the end of October, but you don’t know where all this money is. It’s not in the bank, and you haven’t squirreled away any cash. It doesn’t make sense to you, but your not sure why. Is your Controller or accounting staff stealing from you? – it’s happened before, but this group has been with you a while now and they seem loyal.
You are struggling to make payroll each week and you’re behind on your supplier payments, way behind; many of your suppliers have put you on COD (Cash on Delivery). If you’re making such a good profit why are you so behind? Where is your money?
Then it gets even worse – the IRS has already filed a Levy against your accounts and physical assets, but now they have sent a Notice of Intent to Seize All your Assets if you don’t pay them $35,000.00 within three weeks. You just paid $40,000.00 to your biggest supplier because they had stopped shipment of all goods, including material needed for ongoing projects. They had refused to ship anything more until you paid the $40-K. It was tough to scrape that much cash together to pay them; you had to sell some scrap metal, beg a few customers to pay you early and then nearly emptied all the bank accounts to make the payment.
There’s no way you are going to be able to pay the IRS on time. You have owed them more money than the $35,000.000 before, much more. But you were able to work out payment plans several times in the past, in fact several plans since 2006. So you call your local IRS contact, but she is no longer there as she has retired. The new agent in charge of your file refuses to give any more time due to your repeated pattern of failing to pay your payroll taxes and income taxes on time, as well as your frequent history of paying your back taxes installment payments late.
On top of that you owe $86,000.00 State Franchise Tax that is well past due and the state is threatening action too.
So you go to the bank and ask them for a loan to cover the taxes. You have a long-standing relationship with them. Your banker requests copies of your latest Income Statement and Balance Sheet, Asset Inventory, as well as your latest payroll record in order to process the potential loan. You do so.
Bad news. The bank Loan Board did not approve the loan. They cited several serious concerns:
1) Your calculated loan eligibility rating would be exceeded by the loan.
2) Your Risk Rating is Poor even for their Sub-Prime loan program.
3) You are behind on your payments for existing loans.
4) Your payroll record shows that you have violated some of the covenants of the existing loan because you gave family members pay raises that exceed the agreed maximum aggregate dollar amount that may be paid to family members.
What can you do? Is all your hard work and past success going to go down the drain? You’ve been in business nearly 35-years and you have grown the business from scratch up to over $6,000,000.00 Gross Profit. What happened?
Does this seem like too much bad all at once to be true? It’s not. This is the story of one of our clients from last year.
So, you may ask, “Did they survive?” Yes they did.
Our client decided to bring in our team for a business analysis because he wanted us to find their money. The analysis took two days and it revealed that there was no organized cash flow management. There were not any fraud prevention processes in place, and the business owner was not very involved in the financial management of his company. Bank account reconciliations were eight months behind and therefore the Financial Statements were suspect. Financial and operational reporting was basically non-existent. Discrepancies in payroll Direct Deposits were identified. Intra-company communication was obviously poor and supervision was inconsistent. Employee moral and job satisfaction was rated below average due to poor planning, overall organization and inconsistent treatment of employees, although many of the employees stated that they were very loyal to the owner, but not necessarily to their direct supervisor.
One bright spot was highlighted – The company was well liked by their regular customers..
The client agreed that the assessment was valid.
And so the client agreed to proceed with our consulting services.
Our consultant discovered other serious problems.
To be continued…