Never Complain, Never Explain

As managing partner of GGG and the Turnaround Authority, I get the pleasure of providing guest posts by our other partners. The following post is by our newest Partner, Vic Taglia.

Never Complain, Never Explain

Henry Ford II, the founder’s grandson and Ford Motor’s president or chairman for 34 years, is credited with this saying, though he may have been preceded by Benjamin Disraeli, the 19th century British prime minister. While few of us have Mr. Ford’s money or attitude or Mr. Disraeli’s political philosophy, this advice is nonetheless well worth heeding.

Explanations = Back Pedaling

I have found that when I have to explain anything to my banker, my wife or my vendors, I seem to be backing up.

If I have to explain something, it is generally because something isn’t clear on its face, which means I have failed to make some issue so crystal clear that even a caveman can understand it.  Not to confuse my banker, my creditors or my dear wife with cavemen, but if I have to resort to an explanation, I am in a bad place.

Avoid Explanations

If the notes to my financial statements are not so clear then my creditors have to ask questions and I have to explain, which means I am wasting time that could be used to get better pricing, longer terms, market intelligence or just running my business.

If I have to explain to my banker why the existing financial covenants need adjusting, I am backing up. Explaining non-compliance with anything my banker wants makes more work for him. It also makes him start to ask what else is wrong. It distracts him from getting me more money on my credit line. He’ll have to write some report instead of playing golf with me.

If I have to explain to my wife why I’m late for dinner (again) or why my American Express bill has some peculiar charge from QAT Consulting Group (ask Elliot Spitzer), I am going downhill fast.

Definitely Don’t Complain

Complaining is even worse. Your wife and banker may be sympathetic to your plight, but they are only human, and they have a limited amount of patience for people who don’t measure up or can’t deliver.

I always tell folks I have a limited amount of sympathy and patience, and it’s reserved for my children. Try to save whatever sympathy and patience your wife and banker have for really big problems.

In short, try to measure up to their expectations, deliver what you promise and avoid situations that you have to explain.

When has explaining in your life been indicative of larger problems?

Liquidity versus Solvency: A Lesson in Lacking Money, a guest post by Vic Taglia

As managing partner of GGG and the Turnaround Authority, I get the pleasure of providing guest posts by our other partners. The following post is by our newest Partner, Vic Taglia.

Lehman: From Illiquidity to Insolvency to Bankruptcy to Liquidation

You’re likely familiar with the Lehman failure of 2008. The business model of Lehman and other investment banks relied on leverage of up to 50 to 1 (a 2% capital ratio) and its creditors’ belief that the collateral pledged for these borrowings would maintain its value.

The investment bank business model relies on the market to provide liquidity to allow the investment bank to carry billions of dollars of securities. When Lehman’s creditors began to doubt the value of the securities already pledged, they demanded more collateral.

This led to a liquidity problem; Lehman couldn’t get the cash it needed to operate. When Lehman ran out of collateral to pledge, it had a solvency problem. Bankruptcy and liquidation followed.

Game over.

Understanding the Path to Illiquidity or Insolvency

An industrial business frequently relies on its bankers and other creditors to provide liquidity to operate through open accounts payable and lines of credit. That’s normal.

So long as the business cycle from purchases of raw material through production, distribution and collection remains on schedule, a business can continue to operate. If the schedule is disrupted however, a liquidity problem emerges. Now the business needs to find cash.

Working capital fixes include lengthening payment terms to vendors, offering prompt payment discounts to customers and finding external financing from a friend, a bank or a partner.

This will work until someone loses faith in the business and decides to stop participating in the extended payment terms, the prompt payment discount or the rolling over of bank debt. At this juncture, a new plan becomes critical.

What asset can the business convert to cash? What can it sell for cash now? Equipment, vehicles and real estate are all illiquid assets, but they all have value today—probably much less today than if you had six months to sell, but if you need cash now, you become a very motivated seller.

The end game starts when you discover that these illiquid assets are really illiquid.

Surviving Illiquidity or Insolvency

You can’t sell them fast enough or for enough money to save your business, for instance. If you collect all your receivables, sell all your equipment, all your real estate, all your inventory and still can’t cover your debts, you are now insolvent.

A liquidity problem can lead you to a reorganization filing in the bankruptcy court. Your business can survive a reorganization, perhaps with different owners, employees, and strategies, but insolvency will lead to liquidation.

Illiquidity can be temporary and fixed with relatively simple steps – but you must act quickly. First, identify what can be sold now, for cash.

Insolvency is more difficult; you need more capital, debt relief (forgiveness, payment holiday, etc.) or other more drastic help, and you don’t have a compelling story to attract this help.

Obviously you want to avoid both of these situations. Remember, though, you can survive illiquidity, but rarely insolvency.

What are your experiences with illiquidity and insolvency? Please ask any questions about these differences or what to do if they arise in the comments section below.

My Greatest Magic Trick: Creating a Million Dollars in Cash Flow Overnight

So I’ve decided to share my coolest business magic trick with you. I can create a million dollars in cash flow out of thin air – and valuable as a million dollars is, there’s nothing like magically creating extra time.

Now, now, I know that a magician isn’t supposed to go revealing the way his tricks are done. It’s bad for business, and where’s the money in that!?

But what’s good for you is good for business, so I’ve decided to share.

Now You Owe 4 Million . . . 

First, let’s suppose that you have 30 day terms with your vendors and a million dollars in payables every month. Imagine that we’re just looking at the first four months of the year, January through April.

Over the course of those four months, then, the total payments are 4 million dollars.

Check out this picture:

So how do I create a million dollars?

And Now You Owe 3

All I have to do is extend normal trade terms from 30 to 60 days and suddenly you owe nothing in January!

That means that the million dollars walking out the door in January is still in your pocket. A million dollars has just been added to the positive side of your cash flow.

That’s right: in the four month period of January through April you’re now paying only 3 million dollars! You still owe that million, but by changing the timing of your payments, it’s been pushed back every month going forward.

Don’t Try This at Home

So why have I told you one of my greatest magic tricks and one of the best strategies of my turnaround success? Because the secret’s in the sauce!

My real talent is playing, “Let’s Make a Deal.” They don’t call me Monty Hall for nothing. The key – and hard part – to this magic trick is doing the right financial assessment and then successfully renegotiating with vendors to obtain extended terms and create that improved cash flow.

When businesses try to get vendors to give them an extra 30 days to pay a million dollars, vendors get agitated and concerned. My job is knowing what vendors need to hear, what makes them comfortable, providing them with the proper assurances and then making sure that those 30 days are used in the best possible way to ensure things get back on track by the second month.

Remember, you have to keep to your negotiated deals. You don’t want this to blow up on you, and it takes a professional to see this process through because generally this trick is one piece of a larger successful turnaround and restructuring strategy.

Conclusion

In business there’s hardly anything so valuable as creating time, and if you can make money come out of that time to boot, you’re in great shape. My skills lie in putting people into great shape.

My golden formula is time + energy = value. I create the time and bring the energy, and with those two pieces in place I can provide value.

Have you ever tried to renegotiate your terms? If so, what happened? Have you ever tried this trick yourself?