An IT Services firm with revenues of $40 million
Due to rapid growth and increased expenses in advance of billings, the Company experienced extremely tight cash flow. Additionally, the Company had no way of understanding their profitability on each project. It was made more difficult by the fact that the Company did not close the books or reconcile cash consistently and did not have the ability to accurately report the results, except annually. The Company was also requesting additional financing from the bank but was not able to provide them with timely reporting and accurate forecasts and was continually “surprising” the bank with overdrafts and cash shortfalls. As a result of the cash problems, the Company also developed a significant payroll tax problem with the IRS and was constantly paying state late penalties.
In order to understand the Company’s cash needs, Interlochen implemented a 90-day rolling cash forecast broken down weekly. This was particularly important as the collections were skewed based on billings but the expenses (particularly payroll) were weekly and complicated by the many changes to the projects. We also instituted a daily reconciliation of cash which initially met with internal resistance but was eventually embraced. A new accounting/operating system was implemented, allowing the Company to see its profitability by project. As suspected, there were a couple of projects that were losing money and emphasis was put on operations to improve gross margins, generate additional billings for out-of-scope work or find a way to terminate the project. We developed and maintained a strong relationship with the bank and negotiated several renewals, bridge financings, and term loans. We worked with the internal financial staff to close the books timely every month (within 15 days) and report results to the owner and key managers as well as to the bank. Finally, we encouraged the Company to outsource its payroll and to go onto automated tax-pay. We paid all of the back payroll taxes and began the negotiations with the IRS regarding the penalties. Finally, we brought in a new CPA firm and successfully transitioned from an annual review to an annual audit and dramatically improved the Company’s tax planning and compliance.
Interlochen acted as the Company’s part-time CFO for 2½ years and paved the way for a full-time CFO to be hired. We helped with the transition for approximately 30 days and remained available to assist the new CFO and the owner. The Company was able to terminate a major unprofitable project, which has dramatically improved their profitability and was able to renegotiate another contract to improve margins. Since the banking relationship was so critical for the Company, we helped transition the new CFO into that relationship and were able to manage through the cash needs of the Company under very severe cash flow issues. The Company has been in discussions will several potential buyers who have interest in the Company when the owner decides to exit. Everything has been put in place to realize maximum value for the Company when the time is right to sell the business.