The race to end the accounting year is full of twists and turns. You really don’t know where you are going to end up until that final day where your year officially ends, after which you can begin the arduous process to close your books. But those twists and turns sure make life interesting to plan for.
Case in point: At SRC, we have forecasted our financials that year-end closing more than fifty times. The process has been more interesting in recent years as a result of all the banking changes that have occurred since the downturn in 2008.
One result of that is that last year we zeroed-in on reducing our bank debt as our organization’s critical number. We had set a goal at the beginning of the year to close at $13.7 million in bank debt (our total borrowing capacity is $40 million).
But in mid-year, things changed. We had been debating for some time about when the company should become 100 percent ESOP. To do that, though, we needed to take on debt to pay off the company’s original shareholders. Given the risks of the downturn, we were hesitant to pull the trigger until the timing was right.
All of a sudden, the signs pointed to yes: Our balance sheet was strong. We were diversified and our markets looked good. In general, we knew it would be good to make the move when things were looking up, even if shareholders might be leaving some money on the table.
So we pulled the trigger to go 100 percent ESOP, which amounted to a $26 million investment. To pay for it, we did a combination of three things: we took cash off the balance sheet; we borrowed an additional $7 million from the bank; and then we issued a series of three-year and ten-year notes to the selling shareholders.
Everyone in the company knew about it and participated in ownership culture meetings to learn about the risks and rewards they were about to enter into.
While this was a good plan, it had not been designed at the beginning of the year. We had our work cut out for us. We had just bumped up the projected year-end debt figure for the company from $13.7 million to $20.7 million.
In October 2011, we began estimating what numbers we were going to close the year with. It was our team’s opinion that we would close the year with a total of $16.9 million in debt. If you do the math ($20.7 million - $16.9 million), this meant that they had figured out a way to absorb $3.8 million of the $7 million we had tacked on to the debt target we had set at the beginning of the year. The crowd went wild!
When December rolled around, the real fun began. Our year-end is January, but it’s in December when the twists and turns began. Vendors delivered unexpected inventories. Some shipments became questionable due to part shortages. Customers’ month-ending closings were not in-line with ours, which means receivables would be off by a day and collections would get pushed into the next year. Etc., etc., etc.
When we added it all up, we estimated that we would be off $4 million from the last projection, which offset that $3.8 million we had been celebrating. We were back to looking at a year-end debt figure of $20.9 million. It looked like a push.
But the year wasn’t over just yet since we had six weeks to go. People got to work. Innovation kicked in. Everyone focused to such a degree that we crossed the finish line at the close at $15.1 million. Amazing! The forklift truck parades began anew and the patting of backs and the slaps of high-fives could be heard throughout the halls. We had spiked the ball in the end zone and looked up at the exploding scoreboard. We had closed the year on a high note.
After looking at a worst-case scenario of $20.9 million in debt, the team had closed the year at $15.1 million – which meant that we had wiped off $5.6 million of that $7 million in corporate debt we had added mid-year to pay off the shareholders. Oh what a place!
Then things got interesting. Again. Three working days into the New Year we took on $4.8 million in additional debt. In other words, we had to start all over again from the top. Timing…it will drive you crazy.