Webinar Recap: Becoming Bankable

Manufacturing business owners want to grow and thrive like any business owner, no matter what the future brings. The COVID-19 global pandemic made reaching that goal a lot harder, with supply chain disruptions, operational shifts, and financial consequences all pressing down. The manufacturers who survived the spring and summer of COVID-19 now have to continue surviving AND position themselves for growth in 2021. What does that look like? We partnered with Dare Capital to bring manufacturing & banking experts together to arm manufacturers with the information, insights, and tools they need to succeed.

 

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The Future of Manufacturing

Planning for the Present

Becoming Bankable: Full Transcript Below

Adam Boyd  0:04

Good morning, I want to welcome you to Mobilization Funding and Dare Capital manufacturing series. Well, I’m really excited about this topic today. And we’re going to go ahead and kick off and I’m gonna introduce our guests here in a second. But I want to welcome everyone to the third webinar in our series for manufacturers. We’ve been really excited to do this with Scott Peper and the team of Mobilization Funding. One Welcome back, Robert Conley, and introduce him and Scott in a moment and I’ve got my colleague from Dare Capital Casey Conlon here as well.

So briefly, this the series we’ve done this summer has really been focused on the manufacturing, industry and Mobilization Funding has helped greatly in that they focus on purchase order, WIP and contract financing for manufacturers. Their unique loan program makes funds available for use before you actually invoice for products, with the capital you need on hand you can order raw materials, make payroll, negotiate better terms of suppliers and function more smoothly overall, their loan program is based on your contract or PO not your credit. I encourage you if you’re in manufacturing, if you’re a lender, you need to learn more about what they have, whether you need them now or you’ve got a client who’s gonna need in the future. So, go to mobilization funding.com. So, Scott’s going to have a chance you’re going to hear from him. He is truly one of the good guys in the industry. And I’m excited for you to hear from him today. It’s also brought to you by Dare Capital. Dare Capital specializes in finding small to midsize businesses that aren’t the perfect fit for a bank line of credit for whatever reason, they’re often growing too fast for traditional on credit. They’re really young, quite often under two years of age or they’re in a turnaround mode, many operate on progress or milestone billing have a hard time finding someone who understands their business or can help them close gaps in their cash cycle. The result is that they can’t get the working capital they need to grow. And so, we specialize in AR financing for those companies.

So my guests today are and this is where you’re going to be patient as I learned the slides, Scott Peper and Robert Conley, two wonderful guys, Scott’s the CEO of mobilization funding, and we’ve been working with, with Scott and his team for a while now, from the beginning, I’ve been impressed with his insights into building growth strategies for business owners that allow them to reach their financial potential and their other goals. His company Mobilization Funding, as I said, helps construction manufacturing business owners stay cashflow positive, and grow their businesses was a perfect guest to speak on the subject of becoming bankable. Robert Conley, I’ve known for 10 years or more now. 30 years of business experience and 10 years in private equity. He’s mentored and trained in private equity strategy and operations by Dr. Jim Ashton. And most recently, Robert was the CEO of Bagcorp where in four years he doubled sales from 25 to $50 million. He doubled first year EBITA from breakeven to 1.2 million, and he retired $3.6 million in debt via sales and utilization of efficient asset. So, he’s also a great one to talk about these issues. Both guys are phenomenal, really excited about what they have to say. So, guys, welcome for being here.

Robert Conley

Thank you.

Scott Peper

Thanks for the opportunity.

Adam Boyd  4:52

Absolutely, absolutely. Um, so guys, COVID-19 has thrown a lot of challenges to manufacturers. They’ve survived huge win, and they should take a moment to recognize that but now it’s time to continue surviving. What you do what they do over the next six months determine whether they’re recovering or growing in 2021. So, before we jump into some of the questions, we’ve talked about what have you guys seen and heard from manufacturers over the last few months during the pandemic and where they are now?

Scott Peper  5:17

Robert, let me go first and on that I did um you know it prior to the pandemic and the Coronavirus really kind of sold the whole spectrum I think manufacturing had all the normal concerns of a regular business and managing cash flow, finding good suppliers, consistent suppliers or supply chain terms being paid from their customers in a reasonable amount of time, managing employees, when to spend capital on certain manufacturing lines and then of course, just the general terms of a business what is the typical capitalization of the business. Is the debt load or the or the management of that debt on a monthly basis hurting or preparing the company? And then of course trying to figure out how to grow and get new customers.

I don’t think much of that’s going to change coming out of the pandemic, in terms of what you’re seeing in the spectrum of it, I think there’s two big things coming after is: there’s not going to be as many manufacturers, because some of them just couldn’t make it. We’ve seen some customers that are really in a tough spot, actually, because of the PPP loans and the EIDL loans, the two of them and the fact that they never, their business never really stopped, those two loan programs and access to capital actually drove them out of what was otherwise a really big disaster. We also had clients who got stuck in certain markets where  their employees are being paid, sometimes one and a half to two times more to stay home with the way that they were being compensated from the unemployment tax benefits, that it was really hard for them to get kickstarted again. So, I gave you the whole spectrum. I think it really depends on manufacturing is a broad term, it depends on what you’re manufacturing and who your customers are. I think the food manufacturers really saw a big surplus. We had a company that was a salad dressing company, you know, they were cranking through the entire pandemic, before, leading up to it, they had some cashflow problems, but you know, the PPP money and the EIDL money, frankly, you know, brought him right out of it. That’s general, I think we could dive into some more specifics, but I think from a big picture perspective, that’s what I would offer.

Adam Boyd  7:31

Robert, anything you want to add on to that?

Robert Conley  7:35

I, the fundamentals of business, regardless of the business that you’re running, are always critical. And manufacturing companies very specifically, are always challenged with the utilization of working capital and whether it’s pre-coronavirus, or current. Pre-Coronavirus, they’re dealing with normal working capital scenarios situations. You know, push out payables, fill in receivables, minimize inventory which supply chains effects, right because if I get a long supply chain I’d push in or inventory in. And so that at least from the guy that I was mentored for, by when you can understand how to facilitate and tactically manage those pieces, things can improve or get worse. The one thing that affects them more is the forecasting. So, if you’re not, it’s one thing because you’re running kind of a flatline for the most part. When you aren’t able, we don’t have that log in, you’re looking to forecast sales, and you have a lead time and you’re trying to satisfy a customer demand for You’re making decisions about working capital capex, etc. And the manufacturing environment is the most difficult one to try to figure out those equations for. In so I would say that those things will never change, regardless of as Scott said, they’re always going to be there. And so understanding how to facilitate those decisions, whether it’s based on customer demand, expected customer demand, or current backlog is there’s a lot of refined pieces that can come out of out of thinking through those situations, in structuring your business correctly, to meet whatever it is that you’re trying to accomplish.

Adam Boyd  9:47

So, it’s not necessarily going to get a lot easier. That’s what you’re saying. Now I’m hearing.

Robert Conley  9:53

If you can forecast, if you can understand the forecast customer demand, I think it’s you. I think if you hold on improvement, or anything related to the home or food? Yeah, you’re probably reasonably comfortable with your forecast. Except that it looks like that. It’s on this hockey stick, which is really difficult. Yeah, it’s good, difficult. Yeah, you’re not. It appears that all bets are off, although on the s&p and those kinds of things, companies are annihilating their forecasts in lots of scenarios. Scott?

Scott Peper  10:32

I couldn’t agree with you more. I mean, in some ways, the, if your sales are outpacing your capacity, it’s a really easy strategy. You do whatever you can, and you throw everything you got at it, because it’s not there. But to Robert’s point, if you all of a sudden, you’re you end up with one, one month, two months of inventory on hand and you’re used to only having two weeks, that cash constraint puts on you and sales starts to decline. What do you do then? I think the other piece that we didn’t touch on either is just talent and culture management. If you had a great culture going in to the to the pandemic, it probably helped you a ton to get through it. If you had a poor culture and talent was low, the training was poor or you were in need of doing training, you probably, those problems probably showed up real in a real big way through this pandemic. And I bet those folks that are really struggling right now to get a hold of that, yeah, it’s complex. There’s a those are two things that are really difficult to do. And you can’t just have one meeting and fix that problem. That’s a that’s a long-term strategy shift that needs to be worked on and nurtured daily and weekly. And that’s hard to do and a tough time whether you’re either growing fast, or you’re just in a tough time. Yeah.

Robert Conley  11:47

Can I say something to that? Use a little anecdote, which is to Scott’s point. I’ve been taught manufacturing by some of the best cats around that we’ve been extremely successful and one of them, guy name Dick Fagan, his favorite sayings, because we always did turnarounds in kind of, you know, highly complex and, you know, family kind of environments, and the statement is, fish stinks from head down. And the leadership in most organizations, because the lack of understanding of the components that drive the business is the biggest issue in most companies today. And the leaders don’t know that they need to step out of the way in most cases, because the people aren’t being utilized and maximized in the structures that enable the business to grow. That would actually make them more money if they weren’t running the business and running the people into the ground to Scott’s point. Yeah.

Scott Peper  12:49

You know, to add to that, I think a lot of people are getting the most out of their employees right now. And employees, team members, even you are more than willing to step up and they can drive hard and do monumental things maybe work at 150% of their normal capacity for three months, four months, six months, maybe longer if properly incentivized. But I think right now, a lot of these leaders need to really decide what is the limit that I can push these folks before I bring new people in, just because you’re having a great time now and the bottom line may look better, or you’re even more efficient. You can’t run people in 150% of that capacity forever. No one’s also taking vacations right now. So, all of a sudden someone takes a vacation. What happens? Yeah, about that time, I think people particularly leaders and management really need to start looking at Okay, what what’s going to be normal again, maybe I settle into what maybe it’s 120% capacity is the new norm isn’t but not 150 or 200 day you’re running some people. And I think employees are willing to do anything for a company that’s they love and admire, particularly the leaders that are there. But you got to be honest with them and you didn’t really either Really incentivize them to continue that pace, which is probably unsustainable, but somewhere match that incentive with that extra production, as well as the less amount of people that you have there now, so you can get a more efficient model that can last long term. And you’re probably getting pretty close to that right now.

Adam Boyd  14:17

Well, Scott, you touched on something that I would love for you guys to kind of pull out your crystal ball. I mean, you’ve talked about, we’ve got some people staying at home because the incentives from the government are greater incentives for going back to the business. We’ve got people potentially either running at 150%, because of increased demand. We just talked to a company that manufactures and sells bikes this morning. And they’ve seen sales quadruple because of COVID. Everyone is kind of locked down. So, we’re looking forward and they’re having to get more out of their people, they’re having to invest more. Or you may have people who just they lost some talent, and now they’re having to do the same level of production with fewer. So, what particular financial challenges do you anticipate, those of the manufacturing industry need to be prepared to face for the rest of the this fiscal year. And I’ll start to you, Scott.

Scott Peper  15:11

I think all their normal challenges are going to be there, they’re just going to either have a bigger light on them, or they’ll show up in tougher spots to touch on the touch on culture and people. You know, because there’s more people on employed, there’s more talent available to so and a talent doesn’t necessarily mean there’s going to win those jobs and opportunities come about your best people, if you’re not taking care of them are going to have a lot of options to go do things people cleanse their businesses and when they rehire, they’re going to learn from the mistakes or the things they wish they could have done differently that maybe they couldn’t have been a normal climate COVID allowed them to kind of clean the slate and when they go to bring people back, they’re going to have a new concept of who do I want to hire, what do they want to look like? What is that position like? How do I want to incentivize I’m in the savvy business owners and leaders are going to find the best talent. That doesn’t mean just because the unemployment rate is high and people aren’t working, that they’re going to pull that talent from that pool. It certainly May, but they may pull people are going to look your employees don’t have you’re always going to be looking at jobs and your current people if you’re not taking care of we can easily go look at a nice opportunity and move from one place to the next and you might be hiring from that pool instead. So, I think that’s one thing. I’m also I think, where and when to spend capital and invest in your business. I would really be concentrating right now if I was in manufacturing, how do I get leaner and meaner on my balance sheet? How can I what’s my strategy to pay down any debt I have especially if you had some new visa EIDL loans for 12 months, you have to make payments but you’re going to start to have to and yes three and three quarters percent money for 30 years is probably more inexpensive than any other note on the business. But how can you pay some of those other debt down free up that debt burden on a monthly basis so that you can still remain as profitable as you are now, even when your sales might settle in. Those are the things that I’d be really focused on if I was in manufacturing right now what I try to do.

Adam Boyd  17:17

Robert, you know Scott touched on people and culture, as a two times CEO in a manufacturing shop, is that an unrecognized financial driver that manufacturers aren’t paying enough attention to? In your experience?

Robert Conley  17:35

I would say that the short answer is yes. I don’t believe that, so, one of the things that you missed the question that’s up on my board, but I’m gonna answer your question as well but is what challenges will manufacturers face for the remainder of 2020 steps: on the balance sheet, and you made a reference to a bicycle for a company that had quadruple demand, and they’re willing to that demand. One of the things that happens in businesses from my experience is that we overestimate the future, right? In this hockey stick that a black swan event will create is not what the normal the new normal is going to look like, you’re going to have a smoothing effect on that demand. So, if you’ve seen this fight, you will know that trees don’t go to the sky. And so understanding that you can invest a ton of money right now to try to what you’re really try to do is you’re trying to squeeze the juice out of this particular fruit as much as you can. And what I would submit to Scott’s point is that if you squeeze this juice at an optimal level and don’t over invest in your business expecting this this this hockey stick like effect to continue, then you will strengthen your balance sheet through this opportunistic time. And you will, here’s what I consider: if you raise the bottom rung of the ladder. And your ability to compete in the aftermath of this will be stronger. Okay. And so, you know, it’s just again, it’s the smart or the aware kind of utilization of capital that’s being provided to you because of a unique occurrence. So, I’m being realistic bottom line.

I don’t care if it’s manufacturing to answer your question, business of any kind. I’m working with a coatings company right now, got an investment in and I, you know, there is a lot of structural components that business “leaders” miss in an organizational chart. If you go to business school or anything else and you look at organizational structures, they have to have accomplish a mission whether the Egyptians are building pyramids, or leader is building a structure to accomplish whatever the goal is. And so, you do it layer by layer. Same thing is true an org chart, if you get the right people to leverage the talent that’s going to be available in the market to Scott’s point. And you put them in the right box, and you define that box well, and all the boxes that are next to each other’s boxes understand each other, and it’s a big problem, and they’re all kind of working together and those boxes connected by lines of information because that’s what they’re processing, then the organization begins to accomplish more. And the leader, if they don’t understand that which is not abnormal, they many times don’t, has that’s the responsibility to leaders to connect those boxes with clarity and transparency, so that that structure maximizes itself to accomplish whatever that mission is. Strategy is not a whole bunch of things. It’s a mission, we want to have this level of market share, then you set about the tactics, which is what the organization has to do to go and accomplish those particular missions. And so, yes, leaders miss those pieces, and they throw people and money in different things, an imbalance and lack of understanding the organizational structure. Does that make sense?

Scott Peper  21:30

Yeah, you make a great point. Robert, I’d like to add one thing I made me think about that, you know, you think about that organizational chart. I think a lot of leaders if they’re missing and I did it myself for years prior to ever really realizing it. You give somebody the box, so to speak in the org chart, here’s your job, and here’s the job description. And then you say do your job, right. And old school way I was great. But you know what happens now and everybody doesn’t matter whether you’re in your 20s or 60s. Some people need to know what that box and job is actually working towards, not for them individually, but for the business purpose. And sometimes it’s a mission, and sometimes it’s a purpose, but aligning that job and that description and how it layers in and depending on where they are in the layer cake, their job, they may, they may have two or three other positions that boil up before it really they can really draw that line to what their role is in the purpose of the business and how it helps. And to connect those dots for each individual person is really important because then they know how valuable and important their job is. And sometimes it’s just having the information for the next step to make the right decisions. And that step to the next. And I think that’s one thing that gets missed a lot, probably the most, in my opinion that they meet that could if you just align what everybody does to what that purpose and mission is and how they play that role in it. Everybody starts to see how their rules come together because they all know how it gets to the top piece and that I think that makes a huge difference. For an organization.

Robert Conley  23:01

So, to that point, we use a tool, I use a tool called Operations Review and, you know, taught to use it, understand what it means and, and really it’s a monthly meeting where all managers departments and all the employees come to this meeting, and everybody presents kind of where they want to work we’re doing it’s there’s no right or wrong. It’s not a punitive environment. We’re not trying to you know, by God, correct anything in that. What we’re doing is really is to Scott’s point is creating transparency, top to bottom side to side. And what most leaders, and I don’t care if it’s an HR leader, or CEO or CEO, they say go get a job description. When you go to the web, and you approximate these job descriptions, from job to job to job. You’re like, well, this is close. No, it isn’t. Because you’re processing information for each other on behalf of the customer. That’s the manufacturing process that you’re going through every day. At Bagcorp, I said to the group was, look, I want in order to be able to go through this organization, such a level of understanding that no language is required. But think about that for a second. If an organization understands itself and each other connected why’s that they just feel things go through like this right? Will the customer feels that the organization feels that you have operating leverage, you have lots and lots of things getting done in short periods of time? And so that learning is the process that you need to go through to figure out but it’s not easy. But I’m suggesting that what Scott saying is, right, it’s that it’s that information processing, that is a manufacturing process. And you can go into complex ways to understand in, but it’s not that complicated. And it’s not a ubiquitous job description that fits for all companies. It is for your company, and say, just do these five things. I mean, if you do those 100% Oh, my God, the world gets beautiful for the people next to you, they’re taking the information and passing it along the line on behalf of the customer.

Scott Peper  25:15

Yeah, and you don’t have to come up with new things to say, the one message just over and over again. So, everybody knows and it’s consistent. And they know you mean it, and you’re serious. And that’s where it’s going. You don’t have to kind of create new thoughts and ideas every day just to make it interesting. It’s interesting all by itself, but it needs to be consistent.

Adam Boyd

It’s good. Robert had something.

Robert Conley  25:35

I again, I feel very, very grateful and appreciative for the mentoring that I’ve received, Jim Ashton said, and he’s a PhD in structural mechanics for MIT and Harvard Baker scholar. And I say that because I want to give him the credit for being able to do the things that I’m going to reference. He said, Robert, I can do the most complicated math formulas in the world. Literally. Better not that valid people unless you’re solving that specific problem because people don’t do complex and they don’t do fast.

Adam Boyd  26:11

They don’t do complex. They don’t do fast. No. All right.

Robert Conley  26:17

There’s been true.

Adam Boyd  26:23

Yeah. Good. Well, let me ask you guys. You know, in we’ll start with you on this one again, Scott. How do you when you’re looking because Scott, you’re financing a lot of these businesses, how do you assess their financial health? What are some of the key indicators or metrics you’re looking at? And I’ll ask Robert the same.

Scott Peper  26:39

Yeah. So, in our loan product, we’re short term to solve a specific scenario. And so, what we want to assess is really two things. Before we assess the scenario for which the customer is actually coming to us, the general financial health for us is a barrier that’s just where are you now? Can you sustain me Maintain where you are and what you’re doing. Whether that’s your debt coverage, can you are you paying your bills? Are you cashflow positive? Are you cashflow negative? Or are you just you’re making money you have good margins but you’re being squeezed by your customers just dragged out too long to too many days outstanding or you’re growing so fast that your supplier terms just don’t marry up to the your cash flow yet. So, you’re just a little bit of a struggle, but are you making money? And can you make it work? Or do you need this one project, or this one customer so badly that if God forbid something happened to them, it would bring the whole business down. That’s the first thing we’re assessing. So, for us, and it’s just for our loan product, we want to make sure that someone’s there, they’re okay. They don’t have to be great. They don’t have to be financially solvent they don’t need most of our customers aren’t even bankable. But they do need to at least be able to be surviving and moving through where they’re at in a current state. Once we assess that then we’re going to look at the financial viability of the project or the purchase order that you’re working on. So if you’re in a good state, but you have a project that has razor thin margins and a ton of risk associated to it, even if the PO dollars huge, it’s not necessarily going to help you. But if you are in a state where you’re sort of in a, you’re kind of humming along your bumps in the road, but you now have all that work you’ve done has now led you to this great opportunity that you do have good margin and it is a higher dollar value. And you need the financial backing to just execute on that purchase order without putting stress on what otherwise is just okay, normal, cash flowing business. That’s perfect for us. That’s what we’re looking at. We want to make sure we can finance that opportunity so that you don’t have a pain point in your normal business. Your normal business can continue to operate while you take advantage of this new growth opportunity to have those What we’re really assessing and how we do that is basic financials, bank statements, cash flows, seeing what the capitalization of the businesses, are they able to manage their normal expenses, AP, PE ratios, and then their overhead costs and debt coverage. Those are the things we look at to determine the first part viability of the company. The second part, we just build out the cash flow model, and we do it with them and for them, if they don’t have it already, or will utilize what they have, but we’re going to determine what is the cash, what is the margin? When is the project or project purchase order cash flow itself? And then can we help if we if we help provide the fuel that’s needed to either pay for labor or buy these materials? Is our product going to help them and can they pay the pay the financing cost of that capital, but also does it drive their business forward? Can they bring the money in faster Can they do it quicker so they can do it more efficient and actually save money or increase their margin? Those are the things we’re going to look at and then we present that to the customer so they can see exactly what it’s going to cost. And really our, our cost of capital is really nothing more than in that scenario than one of the line items as in their cost of goods sold. Of course, it’s not cost of goods sold, it’s not a material, but in that purchase order, the financing costs themselves because of the nature in which our loan is going to pay for goods that are otherwise associated to that. It really allows them to look at, Okay, you know what, I have this great opportunity, and it’s at a 25% margin. And, but I don’t have a way to do it, or I can use this funding for mobilization funding, I can get it done. And I’m going to have a 23% margin or a 24 and a half percent margin because I’m going to be able to dry use this cash to drive efficiency and actually executed quicker, faster. And here’s what my margin impact is. That’s really what we look at and we try to make sure we provide all that value to the customer because we’re not just a lender. We really want to have them understand the growth opportunities that they have in front of them. And how best to execute on it using cash because most customers, most of our customers, they don’t have it an endless amount of cash to execute on orders. So, when they do, even if it’s in the form of a loan from us, there’s a lot of efficiencies you can drive there versus just doing it the same old way with alone. Yeah.

Adam Boyd  31:18

Robin, you ran Bagcorp and other companies. What were some of the key indicators you were looking at determine financial health? I know most people are looking very often just sales, and that’s a bit of a straw man. But what were the things that you were looking at that other people may not think of as often that are leading indicators for the health of the company?

Robert Conley  31:45

So, I’m going to build on what Scott said in if you if you think about financing, and you need financing. There are elements of your working capital, or your capex that are out of sync with some aspect of your business. I think that’s fair statement. And so many times and I would say most scenarios in manufacturing, and one of the places that a guy who guys like you would go and look is inventory. Because most people, you know, you’re talking about terms, he talks about all this stuff in very general ways. What you’re really trying to do is take the available pool or bathtub level of cash, and invested into things that give you back cash, right? That’s the net. And so, I can go and hire people. I can go and invest in inventory. I’m effectively providing credit when I provide receivables to people and I’m taking credit I get payables. Right. And so, as I take that bathtub level of cash, and I deploy it in those ways, I don’t see good CFOs are really hard to find. Just because they have a title CFO does not mean that they’re a good CFO, but it’s been my experience at least. And the mechanics that go into these pieces can go into what’s called a 13-week cash flow model. And it’s really a marrying up of those effects, right, because I have customer demand, or expected customer demand. And what happens is the entrepreneur, the business owner, says, I’ve got this big pool of something that I need to mine, right, I’ve got this little thing that I’m after. And if I build all this inventory, I’m gonna sell it to that and I’m gonna mine that gain right. Well, when I mined that gold vein if I take records, it’s beautiful, right? Because it just comes right back. And if I estimate that even close, and I’ve got levels window I’m holding but not too much, right? But if I provide credit, then that mining of that gold vein, depending on that people pay causes the inventory now to turn into two forms of financing, right? I’m taking it out of my cash and I’m giving it to someone else is going to pay me later. Now I have to match up payables to those pieces at a rate, typically, our payables to be two to three x my receivables number, right? That’d be like your scenario, right? Because I’m getting cash faster than I’m actually paying it out. So, the raw materials that I’m turning into revenue, which then equals profit, right, whether it’s face margin, contribution margin, operating income, I don’t care how you look at it. Those are all financial kind of constructs as the numbers flow through the financials, but utilizing those metrics and knowing why do I buy that raw material, how long does it take me to turn it into inventory or an invoice? How fast do I collect that invoice? How fast do I have to pay the person that provided me raw materials? And how much do I make? And how often Can I do that? That’s what you guys are looking at every single day. And the lack of understanding as to what those pieces really are, is what causes companies to get out over their skis. Every day. I don’t care what business you’re in. I really don’t manufacturers is very complicated because margins are skinnier, and investment is high, right? Because I have to sequence those things along that line. And so, if you spend time sequencing those things, and that 13 week cash bar rule gives you the ability to kind of hone in on how you do that. Then you’re watching your cache really moved consistent. Simply, as opposed to having guys like you guys come in and say, you know what you’re doing on the cash flow, here’s what your cash flow looks like. They’re like, Whoa, you can do that same work. If you just take those elements, put them into some Excel model, and begin to watch them how they behave. And then you’ll take customer demand, and you’ll marry it up with how you deploy the cash. And then you’ll be able to see how your business is developing health or sickness, if you will. Hopefully, that makes sense.

Adam Boyd  36:35

Well, and if it doesn’t, they can always reach out to you guys after the fact and ask more questions.

Scott Peper  36:38

And we have a cash flow model that we’re I’m happy to share with any attendees that we could send it out. We have a full instructional guide on how to use it. And it’s a great starting point. It’s very basic. It gives us the basic information we need. But it’s plenty detailed enough for someone that doesn’t have something like this in place to totally get a sense So where things are going and then start to add what they want to it but it’ll give them the ins and outs as Robin just explained.

Robert Conley  37:05

You should take Scott up on that.

Casey Conlon  37:08

Yeah, it’s got I got I got a question addressed to you. It says what was a borderline funding opportunity that mobilization rejected and what was the reason why?

Scott Peper  37:22

What was a borderline funding opportunity? Yeah.

Casey Conlon  37:26

Someone looking, working for funding for you guys you’ve rejected on board on opportunity and why did that very specific?

Scott Peper  37:35

Um, okay, so I’ll give you two examples. We had one last week. financial health of the company was excellent. Normal doing well, fine. They’re trying to get a new customer and they It was a quite manufacturing but it was a purchase order financing. They’re trying to get a new customer, so they bid the bid the product really low. They didn’t have all their costs in line yet so some of their supplies that they had estimated were going to cost actually end up costing a lot some cases double. Anyway, what it did to their margins was it really ended up with a razor thin 5% margin. And in some businesses 5% margins are excellent and that’s great. But in the world that we live in, it’s not it’s too thin from a financing perspective, because they’re the other two problems were they weren’t paid quick enough to Robert’s point they were paid by credit card or paid COD upon delivery. Great No problem, but they weren’t they were actually paid on a 60-day term. And so when we put it in the cash model and showed it to them, and show them what that was going to cost them for, regardless of our financing costs, actually, even if they had their own capital, forget ours, before financing costs, their margins were going to be reduced so much that they actually this opportunity was going to suck all the cash out of their business and the terms they had with their supplier or their AP but they had to pay, they would never have the cash to do it. So, it was meaning they were going to get the new customer execute on the order make 5%. But they’re going to use every bit of cash in their business to pay down other AP because at 30 days, they were gonna, they already owe their accounts payable more money than they had in current AR. So, there’s new opportunity wasn’t gonna be available to pay down that AP, which then would have put their supply chain at risk if they couldn’t get new orders. And over the next 60 days, they certainly anticipated on getting new orders. And that’s again, we so we denied that loan, because if we provided that that would have that would have helped them from the AP side, but all they would have done was brought in revenue and a negative margin or negative cash flow, then bend margin, but after financing costs, and just time is too risky. That’s one example.

Another example I’ll give you the opposite of that had an excellent p o with super high margins, but they had financed themselves with so much debt already to get the business to where it was at and then Without thinking it through had gotten some really wrong forms of debt they were so they didn’t want to sell any equity. And I can certainly understand why you never want to do that if you don’t have to. But what they did in turn was they brought in debt at what I would call equity debt, meaning it cost just as much for the time it’s there, if not more, and that also pulled all the cash out of the business. And even though they had this great opportunity, we would have financed all day long 100 times over and worked with them forever. It was almost like the drain; they were circling the drain. And if they didn’t continue, they’re trying to outsell their way out of it. But the problem is they had already sold so much margin of their future margin to the pay this debt and the debt was too much at too high of a cost with not enough time to pay back. And so, by pulling all the cash out of the business, on the other side, not with the new people, but with the current business. It had the same effect and problem and we had to say no to that. And so those are two Examples and almost probably eight times out of 10. Those are the reasons why we say no to alone one of those two reasons or both.

We’re not the right fit for someone who is, hey, look at this huge problem I got myself into, and can you help me sell my way out of it, that that’s not typically how it’s going to work for us. And a lot of times, it’d be very blunt. It happens with merchant cash advances. Most companies that have utilized the merchant cash advances have put themselves in such a bad spot, cash flow wise using them, that it makes it really hard for any other type of finance or to come in and finance them because there’s not enough cash in the business.

Adam Boyd  41:43

Well, this leads me to the next question, Robert, how do you as an operator and as an investor distinguish between good and bad debt? Scott talked about some debt being so expensive, it’s really equity. How do you determine between good and bad debt?

Robert Conley  42:02

I mean, I genuinely like Scott’s explanation. The second one, specifically. I mean, most of them, but we’ve been talking about is the mechanics of what make a business run. Your money in, you have costs that are time phased related to those top line revenues. And if you understand that time phasing if you will, then you can quickly see and I would say there’s a — I’m aware of this book, there’s, it’s Good Accounting. And it’s by the same guy that wrote the Go, go out. And really it kinda treats all costs as a face sort of really variable costs that come out great contribution margin and then everything else has got fixed. And it gives you evens and understanding how you where you are in that cycle. Debt is a genuine cost. If it’s at higher rates, it has a higher level of negative effect on the amount of money that you’re harvesting on a weekly or monthly basis. Adam, Jack Long said I did daily cash flow forecast right not just weekly. And so, the higher the expense of debt, the more that your daily cash really technically is learning, right? Because if you don’t understand the microscopic aspects of how money is flowing in and flowing out. You don’t see the pockets that you hit because you go. Right? In so expensive debt has a very high cost on the energy of the business, if you will. And so no, all that is bad. But if you don’t understand how those mechanics and your business work, and this is I’m talking about in your gut in your in all this feels like this to me, but like see it, understanding it understanding how those reorganization then you can make that decision that looks good to Scott’s point ends up being really bad, right? I had a similar situation. So, I looked at recently to do a turnaround on their debt. I mean, there were so Over levered, it was ridiculous, there’s no way they were going to dig themselves out of that hole on an earnings basis. The only way you’re going to do that is to wipe the slate clean and reset all the debt because you can’t dig yourself out of the cost. And so, you know, what we really I think find ourselves talking about is guys like you guys who understand what are the mechanics that cause the numbers to filter through the financials, and how they affect the business and what you end up doing is teaching people and then either giving them good news? Yeah, your stuffs pretty good or bad news? I can’t do this deal. Right? But if the owner or executive had that awareness starting out, they’d be informing you as to where they were coming to you to the financing and you’d be like, you’re a lovely, here’s the money. Yeah.

Scott Peper  45:55

And Robert touched on a key point I really want people that are offering This webinar to listen, I think it was subtle, but it’s really, really important, particularly for the types of businesses that I think we see in finance the most. There are two things with debt. Everyone thinks of cost. And I have customers asked us all the time, what’s the cost? What’s the cost, I said, you know what the cost is irrelevant at the moment. But there’s two main problems that you can be over levered, which means you have just too much debt, it can be the lowest cost debt on the earth, you just have way too much of it. And the cost of that payment each month, hurts your cash so much. That’s  the short definition of over levered. The other side of it is you could have the right kind of debt dollar amount, and even at a high cost, but it’s in but it’s in the wrong terms, meaning you’ve got the money you need, but how fast you have to pay it back in the manner in which you pay it back or the manner in which you get it or how you can use it are so bad for your business that it just doesn’t fit. So even though it’s a good rate. In a good amount, it doesn’t work. And that’s really where I see more of the problem because we’re not inexpensive on paper compared to a bank or debt, we’re not inexpensive debt. Which is why when you heard me talk about how we look at the cost, if you have an opportunity to do a 20 or 25% margin product, or project that otherwise you wouldn’t be able to do because you don’t have the money you need, and you need an extra orbit and amount of money in it, maybe 50% of the actual purchase order amount. And you’re not collateralized with a property, but you just have that po for someone to give you 50% of a PEO it’s going to be fairly expensive. However, if you can use that money specifically for that it only cost you 2% of your margin. Well now Okay, you have a 25% margin opportunity. And yes, you borrowed a lot of money to execute on it, but it only cost you two or three or 4% even at that even at the highest. But now you still made 21% and an opportunity you weren’t able to You now have 21% of that pile of cash to Robert Sims to bring into your business and the structure if you keep doing that, and you properly put some discipline to the to the use of that cash when it comes into your business, you can take what otherwise is expensive debt and cycle it quickly and all of a sudden, six months, seven months, eight months down the road, or certain amount of dollar amount down the road, you now have all the cash you need to continue on that path. That’s the that’s the huge difference that is so important. Robert, hit right on the head, but I’m wanting to really reiterate this point. The terms of the debt are almost more important sometimes on the cost.

Robert Conley 48:39

That earlier Scott was merchant funding, when you may not want to tag that, but I’m going to tag it because if you have a lockbox and they’re drawing, weekly, daily, some kind of increments, then you aren’t getting all of your cash and they lock it away from you. And now you’re in this. Oh, I’m trying to catch up to what my cash needs are. And that dead. It could be so cheap that no merchant that’s gonna be too cheap. But the bottom line is, is you’re literally giving up daily, which you won’t have that in your model. Right. Excellent. You are you are. You’re trying to get through a straw.

Scott Peper  49:25

Yeah. I mean, if you’re a retail shop and you bought you have a merchant cash advance, and it’s appropriately sized and you pay it daily and the same point you’re charging credit cards every day. Fine. No problem. No, you’re a business you get paid every week, every two weeks, once a month, and you think you’re gonna make daily or weekly payments and it’s gonna be okay, you are literally just taking a bad problem and kicking the can down the road for 30 days or 45. But when that problem shows back up, it’s now on fire and it’s 16 Anybody that anybody that would provide that debt to you the first time, okay, they understand. But if they say, here’s another cash advance to solve that problem again, the lenders don’t really care about your business or they don’t know enough to tell you and guide you correctly. Either one is gonna have a negative outcome for you. One means they’re a bad person. The other one means they just don’t know any better. But that’s the problem. And then those are the situations I think folks get into. That’s unfortunate. But you know, simple things. Again, if I was going to say simple, I would listen to this one point. If you earn revenue daily and profit daily, then you can handle a daily payment. If you don’t, then you can’t.

Adam Boyd  50:47

Huh? It’s that simple. Yeah, that’s good. I think the net you guys answered these questions. And I think we’ve got we open it up another hour and a half with the next slide, I would like to ask you guys, what’s the one thing manufacturers should be thinking about? Going into 2021? And I’ll start with Scott, you know, start with Scott and we’ll go to Robert but like, one thing is that it is, you know, curly from city slickers. Yeah, one thing, what’s the one thing you’d say? lenders need to be talking to their clients about or manufacturers that we’re talking to? They need to be thinking about and then if Casey’s got any questions, we can go to those. But, Scott, one thing that you could be encapsulating everything you’ve discussed so far.

Scott Peper  51:39

So the question really is, what’s the one strategy or thing if I was a manufacturer, that I would guide or help offer up that you really want to grow in 2021 in this climate that you can, it’s going to help you the best. I want to put a caveat to it depending on your business, and what your strategy is. With it will guide what I’m about to say, if you’re our manufacturing business, that’s your top line revenue is the most important thing. You got to make money, but you’re driving top line and because top line you get to a certain top line, it’s going to allow you to immediately be purchased or acquired or something of that nature, then that’s a different, that’s one strategy if you’re trying to be the most profitable, and you see your manufacturing business as a business, you’re going to own a long period of time and you want it to be sustainable. I’m going to address that secondary version first. I think you need to take what we’ve talked about and Robert laid out very eloquently with a cash flow model. And you need to find that if you don’t have that, you’ve got to find it either some type of CFO and not anyone’s the same somebody that knows that cash flow really well, to show you two things, what to cash flow of your businesses and then take it one step further. What is the cash flow of each customer in your business, because you may find out. And most businesses do if you have a lot of customers, certain customers are gonna be a lot more profitable than others. And it could be because of the supply, not any fault of errors, but maybe the supplies you buy for one customer, you have better terms with and you can execute better. And if you know those margins, you can drive at the customers that are going to help you create more cash in your business. And that is the key for you. It creates so many opportunities, and sometimes it might it’s easier said than done. But what I mean by that is if you have the data and the numbers and you understand the cash flows, it’s not hard to make the decisions if you know that all of your customers are lined up and around. One of them is breakeven neutral under your current structure. And one of them produces a 35% profit but your average profit is 20. And you’re treating all five customers the same. It’s not hard for you to get that information. Now you might say well, why am I even sell them to this customer I’m certainly not going to give him a price break or you know what, it’s certainly there’s no problem with me taking the risk to go to that customer and tell him I need a price increase. And if they say, No, who cares, you’re actually going to make more money with less revenue. But without the power and the tools that Robert walked in, walk you all three are with the cash flow and a good CFO, you’re, you’re really never going to have the ability to even make that decision. And so that is the most important thing I would do if I didn’t have that ability, or I wasn’t capable myself making those decisions. And by the way, I’m not I have an excellent CFO, and I’ve been blessed with someone who produces a spreadsheet for me that anybody on earth can read and say, Well, I want to do more of that and less of that. But I could have never put that together for myself. No, no chance. So, it’s, it’s amazing. I say that because I’m one of those people that couldn’t do it myself. So, when I have that sheet in front of me, it’s like, it’s like making elementary grade decisions. It’s really easy like a guy want you to your point. In the face that hurts, don’t please do that anymore. And or this is great, I feel awesome. You know, hand me a stack of money. You know, it’s that easy to do. But it’s not easy to get the information to that pattern. So that’s the one thing I would really do is make sure you get that talent whether you outsource it or bring it in, into your business, you’ll make your life way easier.

Adam Boyd  55:23

Robert, we’ll turn to you one thing you just said, hey, there’s one thought I want to leave people within manufacturing, they want to survive and grow in 2021.

Robert Conley  55:32

Strengthen your balance sheet, said again, strengthen your balance sheet back there. Everything we talked about, rolls it into strengthening your balance sheet. If you want to go assuming that you’re looking at is 2021 is the opportunity you’re going to exit this vulnerable period. Then the balance sheet is where growth comes from. Hard Stop.

Adam Boyd 56:080

Hard Stop. Love it.

Scott Peper  56:08

Pay that debt down you sooner I mean pay paid down your business is profitable.

Casey Conlon  56:17

Yeah, Scott, we had we had a question for You are mentioning 2,3,4 percent coming out of the margin on that purchase order earlier was were you speaking to PO finance or AR Finance? In that example, this is from Matthew in the audience today.

Scott Peper  56:36

Um, you know, if you think about traditional financial aid, what I’m talking about is really the margin on the job. So, let’s just say that someone has $100,000 RPO and it cost them $80,000 to execute on that labor, cost of goods, material, etc. So, they’re going to by the time they do what they normally do it, they invest $80,000 over 60 days. period in their business forget financing at all. I’m just saying just take a business say, Oh, I got $100,000 PTO, this is what it costs me to bring the raw materials in. It’s a week’s worth of labor to make it, I ship it, and a week, a month I get paid. And that whole episode is creates $20,000 of profit. And you can’t do it because you don’t have $80,000. What I’m suggesting is if all of a sudden you borrowed some portion of that 80,000 let’s call it $50,000. And for round numbers sake, it cost you $5,000 to borrow that 50. So instead of 80,000, and now cost you $85,000. Well, that would be five additional push that now you’re only making 15%. So, the 20, 15,000 instead of 20,000. But you’re able to actually do that work, you’re able to really take on that piano that you otherwise wouldn’t have. That’s what I’m talking about where that 5% $5,000 using that round numbers. I’m not saying that’s the cost of our loans or anything, I’m just trying to give an example of what I hope is a question to give an easy example using just simple round numbers.

Robrt Conley  58:09

Again, I just want to give you a perspective to build on that. In every single case, you have a pie, you have a margin pie that you’re slicing up. And what Scott’s saying, I think simplistically is, is that everybody gets a pie. And if you take cash, in order to go get that pie that you otherwise can’t get, if someone takes a sliver of that pie, don’t get hung up on the sliver that they’re taking, because you’re taking the larger portion of that pie as a benefit for the money that’s being provided. It’s just like a tool and mining. I don’t care what you’re going after. If I don’t need to go rent a jackhammer to go through something and it cost me then it cost me I’m just taking Now out of this pie, now I get the majority of the pie. And people get all worked up about how much they’re giving someone to go do something. That’s not the point. Don’t step over dollars to pick up dimes. Look at that piece and see how much of the pie are they taking? Oh, this seems like a lot. Not really, because you’re getting the majority of that pie by that person that money. Don’t down the road, do it again. Right? Don’t worry about it. Don’t get hung up on somebody else. You know that you’re making and wash, rinse, repeat. You want that tool over and over and over. If you could do 50% on $100,000, you can do it faster. You don’t need to worry about the financing God give up your percentage of PO and move it and do it again.

Scott Peper  59:52

Yeah, and if you’re used to ordering your products from your suppliers and paying them in 30 days, and the cost is x but now you have this ability to go to your supplier. And let’s say you use the exact same example it costs you $5,000 to borrow that 50 in that example, but now you take the 50 when you have it and you say, Okay, well, you go to your supplier say, Hey, can I buy? What if I pay you COD, maybe they give you a 3% discount or a 2% discount? Well, you just, you just shrunk your costs in half. And now you’re not because you had the cash, you weren’t able to do it more efficiently. Instead of costing you 5000. You lowered your cost by instead of 80 down to 77, for example, and yeah, you added maybe 5000 of cost instead of 80. It now cost you 82. Well, you’re able to save add call add financing costs, but save in maybe negotiating through suppliers or we have customers on the construction side of our business because they have the money for a payroll and labor. They’re able to do the work and weeks faster, they say a week’s worth of labor. Other customs of ourselves. I’ve never had the case like this before to us, you know what, I’ve done this this whole time I’ve slept at night, because I’m not scared of how am I going to make payroll? or What am I going to do and you know how to pay a lot of money for that. Matter of fact, I just had a customer Tell me last week, Scott, this is not a big deal. Three weeks ago, I used to spend just at least one week a month chasing all my customers down for three days a week to take the money they owed me at a discount so that I could make payroll. And they would take three, four or 5% less from those guys all the time. So, there’s, you just got to look at the way

Robert Conley  1:01:36

No, no, no, I just gonna have a good build of that, which is, I’m not trying to take business away from you guys. But go to your suppliers and ask the same question. Because that’s all you’re doing really, fundamentally, is if you said, Hey, would you take a price increase in order to give me longer terms as to the longer terms for Christ’s sakes? You know, the last thing you never asked? You never get in you say, oh, by the way this looks happening. Here’s my financials. Here’s what looks like, hey, like that, but you don’t need Scott or their capital, you go with your suppliers, put the leverage on them, give them a portion of your margin that and continue to grow that way.

Scott Peper

Don’t do both, though.

(Laughter)

Scott Peper  1:02:29

Our purpose and mission is to help the people we come in contact with and what you just suggested, Rob those ideas. Those are the things that we come up with all the time, we lose business or deals if you want to call it that all the time, because it’s something we suggested they go do to try to make it better and then they able to work it out with their supplier, their customer, and that’s fine. It’s not a big it’s not a problem at all. Because now the supplier structure, they’ll go get the work that they said no two are the purchase order. They said no to before and they will need us later. It’s a long game. You don’t need to win every game, short, long game, so we’re, you know, we’re here now,

Robert Conley 1:03:04

One of the things that customers do. Most owners do think that having more vendors is better for them because they get price discounts. It’s not, we can sell the vendors in every single company we ever go into. Because if you go in and concentrate your business in, in, in smaller numbers of vendors, you think it’s risky. It’s risky all the time. But if you go get smaller numbers of vendors, larger numbers of your business, find that those vendors will do amazing things for you. If they’re the right vendors. You will find opportunities with that as true thing that you go do. Just that’s it.

Adam Boyd  1:03:48

Guys, we’re at the top of the hour, we’ve gone over a little bit. I just want to encourage folks, Mobilization Funding has some phenomenal resources, check out their site and their YouTube channel. If you have questions about operations, about sales marketing, I’d encourage you to reach out to Robert Conley. You can find him on LinkedIn. Find Scott there. Scott has a lot of great content. If you got any questions, reach out to us, and we’re happy to point you to those guys. So, Scott, Robert, Casey, thank you all for being here. Appreciate your help. Have a great day. Thank you.

 

Transcribed by https://otter.ai

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