What would you do if you lost a customer that represented more than 60 percent of your business? How about if a key employee jumped ship and joined the competition? When customers pay late, equipment is tied up in repair and vendors come knocking, business owners can run out of the “liquid” that fuels business operations: cash.
“Hopefully, a banker is talking regularly with customers and asking relevant questions along the way so there is an indication that a business may be heading toward a performance downturn before it happens,” says John Covington, vice president of business banking at Fifth Third Bank in Cincinnati. “I can’t stress enough the importance of ongoing dialogue with your banker.”
Smart Business asked Covington how business owners can plan for tough times and work through them with successful results and, in effect, a stronger relationship with their bankers.
What obvious signs indicate to a banker that a business is in trouble? What can cause a ‘tough time’?
Usually, bankers suspect when businesses are experiencing a challenging operating cycle. The trick is to pay attention and be prepared before events impair their ability to pay any principal and/or interest due. Businesses may appear on an overdraft report and rely on overdrafts to cover checks written to suppliers or employees, or banks may notice lack of timely correspondence. Owners may delay sending in financial statements or ignore phone calls from the bank. Finally, the financial statement may reveal that an operating covenant has been violated.
The events that can cause owners to pay late or not at all range from a slow economy, lengthening inventory turns, increased competition, changing technology, different payment terms from customers or vendors to losing a key employee or customer. Bankers who do their jobs are asking about these issues before they become concerns for business owners. Similarly, owners must be honest about changing business conditions and how this will affect their ability to perform and, ultimately, pay the bank.
When an owner approaches the bank during a tough time, how will a banker work to develop a solution?
It’s always better to plan for a potential problem so you can work through tough times rather than waiting to react to them. But business owners who are tied up in daily operations often let financials slide too far before realizing they must turn around their situation before a ‘tough time’ sabotages the business’s potential for success. That said, bankers will review company financial statements and compare performance to past years, quarters and months.
Furthermore, how did the company perform relative to the established financial covenants? Just because a company may trip up, a covenant does not necessarily mean a bank will ask for its money back.
Set appropriately, financial covenants serve as an early warning system that, when breached, forces dialogue between the banker and the borrower. Bankers dig for reasons and ask, ‘Why? Why is inventory turning slower? What is putting a crimp in cash flow? Is it different vendor payment terms, slow-paying customers or unexpected operational expenses? Why did a key employee leave? Did the business offer him or her a profit-sharing plan or incentives to stay? What is the company’s customer concentration profile should the business work to diversify?’
After reviewing the ins and outs of the business, bankers will address areas where owners can cut back. For example, if the income statement shows a business is not earning enough money to pay for its operations, then an owner must either generate additional profitable revenue or remove a layer of expenses. The banker then works as an adviser, helping the owner to work through scenarios to improve the financial outlook of the company.
What preventive measures can owners take so they aren’t putting out fires?
Develop contingency plans to address risk factors in the business, and update those plans on a regular basis. For example, one of my clients lost a customer that represented 80 percent of his business. This was a big loss, but the owner knew how to react. He had a plan. First, he recognized that relying on a customer for such a large portion of overall revenues was risky. But the company’s overhead structure was such that the owner could control expenses and make adjustments if necessary. He planned to pay down the building loan so he wouldn’t have this fixed, monthly payment. He had a ‘skeleton staff’ he could rely on if he had to cut labor. So when he lost this customer, he acted on his plan. Today, his business is smaller, but it’s still profitable. Because he could react quickly, his business didn’t miss a beat, and his financials did not suffer.
JOHN COVINGTON is vice president of business banking for Fifth Third Bank. Reach him at firstname.lastname@example.org or (513) 530-0791.
Everything was fine with a product line at AddisonMcKee Inc. until Joe Eramo decided to add more bells and whistles to it to make it more high-tech.
“It was the absolute wrong decision,” says Eramo, president and COO of the company’s North American operations.
Eramo knew he had to own up to the mistake, and then quickly get people back on track. He visited with customers and looked at what the competition was doing, and then he updated employees.
“I had to motivate by the fact that this is where the marketplace is going, and if we don’t move fast, we are going to lose market share,” he says.
The company, which designs, manufactures and supplies technologies for automotive, aviation, truck and shipbuilding requirements, posted North American revenue of about $30 million in 2006.
Smart Business spoke with Eramo about how to communicate with employees.
Q: How did you establish your company’s culture?
We relocated a year ago, and during that relocation, I started a lunch with the president [program], where I would meet and have lunch every two weeks with a group of five to 10 employees. It started with the relocation, but then we would get into other business topics.
We’ve resurrected those meetings, and every other month, I’m meeting with a group of five to 10 employees, discussing any topic they want to talk about. I’ll give them an update of what is going on from my perspective, but I want to know what’s important to them and what they think I need to know.
In the months I’m not doing it, one of the VPs of the company is meeting with a group of five to eight employees and is trying to do the same thing.
We do casual days on Friday. We do have people who work from remote locations. It’s something we wouldn’t have done five years ago, but now we accept we have to be more flexible.
Q: How do you get employees to let their guard down?
I’m on the floor almost every day. I’ve changed my leadership style from maybe being hands-on to being close to the action. When I was hands-on, I was probably too involved in running the business and not involved enough in improving or growing the business.
I need to be close to the action, and I need to know what is important with our customers and employees and know what is going on in the marketplace, but I can’t be so hands-on that I’m not spending my time improving and growing the business.
Because I am close to the action, they know me. I stop and ask questions and encourage it’s OK to say we are doing something wrong and to face up to certain things. I tell them there isn’t a single question they can’t ask.
Q: How did you learn to be less hands-on?
It was a change of mindset. We all recognize that’s the problem, and it’s something we may have risen to where we are today because we were good at running the business, and it’s hard to let go. By bringing in good people, those good people are only going to stick around if you empower them to run the business. I certainly recognize that. If you need me to make a decision, then I don’t need you.
Q: How do you find good employees?
We set it as a goal three or four years ago that we wanted the dream team in our industry. We felt if we had the best players, then we would win the game. We set out to find the dream team, some of which was industry-related people with industry experience.
Then we went outside the industry. We wanted people who didn’t know anything about us. For example, our global marketing director did not come from this industry, and that was a specific goal. We wanted somebody to market this company completely different than this industry has ever seen.
There are certain positions in here where we want the best from this industry, and there are certain positions in this business where we specifically wanted someone without any industry knowledge and with a clear, fresh, new look on how we market ourselves.
Q: How do you know if a potential employee will fit with your company?
That gets into the skill set of reading that person. Have we been fooled before? Sure. Everybody goes through that and has been fooled.
We have a number of rounds and a number people involved in the interview process and are looking for different things, but sometimes asking the same questions. Do we get the same sort of responses, and is it consistent? Is this person true to what they are saying across the board?
HOW TO REACH: AddisonMckee Inc., (513) 228-7000 or www.addisonmckee.com
The president and CEO of Sunny Delight Beverages Co. saw the cost of his raw materials spike precipitously with no sign of ever coming back down. Packaging costs went up, diesel fuel doubled in price almost overnight giving his transportation costs a jolt, and he had a customer base that had seen virtually no price increases for his products in 10 years.
Hurricanes on the Gulf Coast caused the price of orange juice one of Sunny Delight’s primary ingredients and fuel and materials costs for its packaging to follow a sharp upward curve.
For Sunny Delight and Cyr, it was somewhat of a wake-up call and a time to embrace a new way of looking at how the company would need to operate in the future or perish.
Perhaps the most important realization for Cyr was that the days of price stability were gone. If Sunny Delight was going to keep its prices stable in the consumer market, hold onto its core customers and remain competitive, it was going to have to find new ways to control costs in a much more volatile environment.
“I think the first step was to accept that the new reality was here, and that it was permanent, as opposed to a temporary phenomenon,” Cyr says. “So for us, it was when you get to the point that you have a new reality, that oil is $65 a barrel on an ongoing basis and it’s never going to return to $30 a barrel. You could no longer assume that you were going to have relatively constant costs on an ongoing basis.”
Declaring war on costs
Cyr knew that he had to attack costs, and in a way that would not simply allow Sunny Delight to weather the immediate crisis, but that would be sustainable for the long term.
So Cyr became an expert in some critical cost areas, like resin. Resin is used in plastic bottle production, and its price rose dramatically as crude oil prices spiked.
“I ended up making myself an expert in resin cost tracking,” Cyr says. “Why is the CEO spending a lot of time tracking the price of resin and making predictions about where the price of resin is going to go, based on the cost of natural gas, the cost of ethylene and all kinds of things?
“The reality was that was an area where we had just been accepting the prices at the end of the month that were reported by the industry trackers and not having any foresight. It was always a look back and next month the cost could go up 12 cents. We didn’t have any idea what it was going to be, and that was inadequate. So I made myself an expert on resin pricing.”
For Cyr, the self-education accomplished two things: It gave him an intimate knowledge of the market for a critical commodity and an insight into how that level of familiarity can be of value in other areas when it comes to making decisions.
“As a result of that, I set the standard for what I expected from our purchasing folks in their management and predictions on resin pricing,” Cyr says. “Once we got to a level of competence that I felt matched our needs for business decision-making, then I pulled back, and the purchasing organization completely manages that process. But we needed a step change there because we were very vulnerable on resin pricing.”
Cyr hasn’t stopped there. The lessons of the hazards of price fluctuation taught him that he needs to be constantly vigilant. For instance, surging demand for ethanol has put upward pressure on corn prices and, in turn, on another commodity that Sunny Delight uses extensively.
“What’s the big bear this year might not be the big bear next year,” Cyr says. “A year ago, I didn’t know a lot about corn pricing. I now know a lot about corn pricing and demand for corn and ethanol, and how that whole matrix works so that I can be effective about making decisions about how we formulate products, when we use alternate sweeteners, when we have to take pricing based on the cost of corn, and how far out we should lock in our corn prices.”
Fielding a winning team
Even the best coach can’t win without good players, and good players are vital to winning games.
“One of the lessons that we learned in running this company is probably the most important thing the CEO does is put the winning team on the field,” Cyr says. “That means doing a good job of signing up the talent you have on the field and making sure you know what they’re good at, and then making sure that they play to their strengths. One of the things that I think too many people have done is spend their time trying to fix the weaknesses through their opportunity areas rather than leveraging their strengths. My focus has been that if somebody is good at something, I have them do that over and over again to the benefit of the company and, hopefully, play the game in a way that the weakness is not exposed. That’s my mission, that’s my job, to find out where the strengths are and leverage them as much as I can.”
But while he sees value in keeping players in slots where they perform exceptionally well, he’s not averse to changing the chairs around when it means a more effective lineup. Cyr has strengthened the team by viewing individuals in the organization not in terms of their titles and responsibilities, but in the context of their competencies.
“One of the things we’ve done is we’ve made our organization very fluid,” Cyr says. “People all have the same titles and responsibilities, but we view every person as having a broad range of skill sets, not as a title or job description. If their skills are best used in working on a different project than what they’re working on, then we sit down with them and talk with them about what the benefit would be in terms of broadening the skill set by working in a different area. They’re usually fired up about it, and they move on.”
For example, one of the tactics the company decided to use was to preserve its traditional price points by revamping its packaging. The manager who ran Sunny Delight’s price-point management initiative is the same person who manages its logistics.
“Typically, a logistics guy would not be involved in the development of a new package and the manufacturing start-up of it and the selling with our customers, but we needed to get that initiative into the market in a short amount of time,” Cyr says.
In another case, Cyr took a process Sunny Delight used in one part of its operations and applied it to another, again using a manager from another functional area to lead the effort because of his set of competencies.
“We took the lean (manufacturing) tools, and while we’ve been using them in our manufacturing operations for quite some time, we turned them loose on our back office operations,” Cyr said. “In fact, we brought in one of our plant engineers and had him lead a kaizen, a process that you use in lean manufacturing, and had him lead it on our back office trade spending program ... and we found tremendous opportunities to cut our costs by having those tools applied to a back office operation. We applied it to legal costs, we did it on marketing costs.
“We attacked every single process we had, and the amount of money that fell out of that process was tremendous, and that was a real breakthrough for us.”
Engaging the work force
Cyr found that communicating with employees was a critical factor in making the adjustments to the new reality because everyone had to work together to change the company.
At the beginning of each year, Cyr and his team put together the company’s goals for the year in very simple terms. As the company headed into 2006, for instance, the goals were to drive the top line, fix the bottom line and generate cash.
“Those sound simple and obvious, but it was the simple and obvious that made it powerful with our employees. And as a result of that, the employees knew what they needed to work on,” Cyr says.
Regular meetings keep the employees abreast of the progress against the goals.
“We have monthly town-hall meetings with our employees, where we gather them all around, report the results of the business for the last month, key strategic initiatives and then field questions,” Cyr says. “It gives the employees a real good sense of reality; how are things working, what’s not working. It gives them a chance to learn about what their peers are doing, and when you give a consistent message from the beginning of the year to the end of the year and you measure yourself against it, people can do amazing things.”
In a monthly letter to employees, Cyr reiterates Sunny Delight’s results for the month and highlights specific accomplishments against the goals that have been outlined.
Cyr also finds that spontaneously celebrating successes along the way keeps the enthusiasm level high and provides instant rewards and gratification for individuals and the team.
“We have a variety of ways, but we have a bell that we call the victory bell, and it’s mounted in our offices here and anybody can decide to ring the bell,” Cyr says. “When they have a significant win, they ring the bell. No matter where you are in the offices, you stop what you’re doing. If you’re on the phone, you put the telephone down and tell somebody you’ll be back in a minute and you walk out, and the person who rang the bell, usually in three to four sentences or less, explains to everybody what the big win was, and we all clap for them. So it’s an opportunity for people to celebrate what they think is important and for all of us to recognize and acknowledge it.”
All the strategic moves have paid off for the company. Its earnings for 2006 were double what they were in 2005 for the $400 million company.
Cyr says the CEO’s most important function in a situation where fundamental change in the way the company does business, or in any crisis situation for that matter, is to set the tone for the organization.
“Setting the tone in this case was accepting the reality, setting the targets, and then communicating to people that we’re all in this together and that we’re going to find the solutions to do it,” Cyr says. “If you do that, I think people will give you their best, give you their best ideas, give you their best effort and, at the end of the day, as you celebrate the successes as they come along, people feel like they’ve all been in the same boat and rowing in the same direction.”
HOW TO REACH: Sunny Delight Beverages Co., www.sunnyd.com
When Dennis Smith founded Masters Pharmaceutical Inc. in 2001, he had grand dreams of a thriving andsuccessful company, and today, he is living those dreams and making new ones.
When he started the company, he envisioned a dynamic pharmaceutical sales, marketing and distribution company. He thought that if he and his employees made 100 calls a day to more than 55,000 pharmacies, long-term and managed care facilities, and smaller wholesale distributors, that eventually these entities would start to understand the ways his company could help them save costs.
He wanted to offer deep discounts to these entities without sacrificing quality on both the product and service sides of the equation, and since the company’s beginnings, both revenue and customers have grown rapidly. By the end of last year, Masters Pharmaceutical had more than 7,000 customers, and Smith hopes to have 10,000 by year’s end.
As he realizes his goals, Smith also makes new ones and positions the company for further growth. He created a compliance group on-site to deal with all the DEA and FDA regulations so his employees can focus on their responsibilities and carrying those out to the best of their abilities. He says that his people are like the spokes of a wheel, constantly turning and succeeding because of their individual strengths.
Last year, he also created a new company called Masters Healthcare, and for the future he hopes to combine his two ventures into one facility as he sees them reach new levels of excellence.
HOW TO REACH: Masters Pharmaceutical Inc., (513) 354-2650 or www.mastersrx.com
When Rick Maxwell graduated from college in 1976, his future father-in-law invited him to join the family business. He decided to accept, and Maxwell spent the next two decades working his way up and growing the business’s revenue.
While the revenue had grown, so had the number of family members, and Maxwell now faced working with people with opposing philosophies about how to run the company. He and his wife decided to purchase 40 percent of the business, but they had to find the funds to do so. He used his connections in the banking industry and secured the money needed, but they personally guaranteed the debt, so failure was not an option.
When he purchased the company in 1995, it came with a sales staff, service technicians and existing customers, but he didn’t have a support staff to handle the day-to-day operations. In three months, he had gotten furniture, computers, phones and additional staff to handle billings, payroll and payables. At this point, Maxwell named the new company OfficeWare Inc., which integrates hardware and software for the reproduction industry.
Since starting the new business, he has focused on his team and making a great work environment for them. He invests in new technology and rewards employees for their efforts, giving the top employees a weekend at a hotel and a five-hour, $1,000 shopping spree at Christmas.
He also creates long-term relationships with customers by giving them value-added services to differentiate OfficeWare and continue its success.
HOW TO REACH: OfficeWare Inc., (800) 888-2797 or www.officeware.com
In 1978, when Tom Thieman took over as president and CEO of his father’s stamping business, Thieman Stamping Inc., he had plans to grow the business. Over the years, he’s done that, but he’s done so by maintaining the company’s focus and not getting lost in the short-term gains that some opportunities can present.
He’s made two strategic acquisitions over the years, which created Thieman Tailgates Inc. and Thieman Metal Tech LLC. But acquisitions alone don’t grow a company. Thieman has employed a strong dedication to both customers and employees.
For customers, warranties aren’t challenged. He says it costs less to replace something than it does to argue about it. This creates a strong sense of trust. For employees, he pays their life insurance policies, and while the company used to pay 100 percent of health benefits, they’ve been able to absorb most of the rising costs, and employees now pay just $40 a month for their and their family’s coverage.
Thieman has had his share of challenging times, too. After a manufacturing recession in 1998, he lost six figures worth of money when a major customer filed for bankruptcy. He was determined not to let that happen again, so today no customer can account for more than 25 percent of the company’s revenue. When one starts to approach that mark, he finds other services to expand into to maintain a balance and ensure future success.
HOW TO REACH: Thieman Stamping Inc. and Thieman Tailgates Inc., (419) 629-2612 or www.thieman.com
Larry Powers is always on a quest for a new challenge or opportunity.
In 1979, as president of a small company, he turned the business around, which led to an acquisition by Bairnco in 1983, which created Genlyte Group Inc. in 1984.
Genlyte struggled initially and amassed high debt while going through five presidents until Powers was appointed president in 1993.
Upon his appointment, he first met with the board of directors to create a turnaround plan for the lighting company. He organized the company into decentralized business units and gave each division manager complete authority and responsibility for that division, all the way down to the profits and losses. Each manager was also charged with new product development and driving those products into their appropriate niches in the marketplace. This approach has created a very entrepreneurial culture within the company.
Powers focuses the group’s growth on expansion and acquisitions. Last year, it introduced more than 20,000 new products in more than 380 new product families. It also released 80 new customer catalogs and brochures.
As a result of Powers’ efforts, Genlyte has been handsomely rewarded in the marketplace. As chairman and CEO, he has doubled Genlyte’s revenue. The company has also made Forbes magazine’s Platinum 400 list of the best big companies for the past five years. Additionally, the magazine named Genlyte the best-managed company in the capital goods industry category last year.
HOW TO REACH: Genlyte Group Inc., (502) 420-9501 or www.genlytegroup.com
Kevin Vasquez has always known how to work hard. After his father died when Vasquez was just 9 years old, his mother moved him and his three siblings to North Carolina. Even at that young age, he felt an intense desire to provide for his family and keep them off of government support while his mom struggled to make ends meet. Vasquez did everything he could to help, from cutting grass to working as a janitor and spending long days working in the Carolina tobacco fields. The long hours instilled not only a solid work ethic but also fueled a desire to succeed.
After putting himself through college, Vasquez found himself working f o r D i a m o n d Shamrock/Fermenta. He worked his way up to the executive vice president role and was asked to move to Germany. He declined the promotion for personal reasons and was instead offered a chance to turn around the company’s largest channel/distribution partner, Butler Animal Health Supply LLC. In 1999, he was appointed executive vice president and chief operating officer. The company was family-owned, and it was on the verge of bankruptcy. In 2003, he teamed up with a private equity firm and acquired Butler. Vasquez immediately redefined the company’s mission and vision, and implemented a profit and loss discipline that was critical to ensuring longevity. Within a year, sales were increasing. Through a key acquisition, Butler has now become the largest veterinary distribution company of companion health products in the United States, and maintains a 98 percent satisfaction rate among its customers.
HOW TO REACH: Butler Animal Health Supply LLC, (800) 282-5162 or www.accessbutler.com
Bob James and Tony Izquierdo used to work for competing companies, but over the years, despite the competition, they respected and admired each other, and a friendship was born. Eventually the two found themselves working for the same company, and they bonded even more through a common idea for a business venture to start an infusion company.
After investigating the market and seeing it had a shrinking profit margin, James and Izquierdo didn’t give up. They modified their idea from an infusion company into a home health care provider, now known as Care Connection of Cincinnati.
When they started, James performed all the patient care because he’s a registered nurse, and Izquierdo handled all the marketing. They both went through six months of being on call 24 hours a day, but at the end of that period they started to see a positive cash flow. Care Connection is now the largest independent, locally owned home health care provider in the Greater Cincinnati area, and was named to the Top 500 “HomeCare Elite” list by Home Health Line magazine. The magazine evaluated close to 7,000 agencies across the nation and ranked Care Connection in the top 7 percent.
James and Izquierdo pride themselves on how they’ve gotten to where they are, but they know they also have to continue looking forward. They invest in research to discover, test and develop new treatment options and approaches to care to help them continue providing the best service for customers.
HOW TO REACH: Care Connection of Cincinnati, (513) 842-1101
For two decades, Ernst & Young and the Entrepreneur Of The Year® (EOY) awards have honored entrepreneurial men and women and the companies they build and grow. During that time we have chronicled their capacity to transform organizations, create new products and industries, enrich individual lives, and contribute to the vibrancy of national economies.
Each year, the South Central Ohio & Kentucky EOY finalists and award recipients demonstrate incredible depth of character as they develop new technologies, create faster ways to distribute goods and services, and improve the quality of life for people around them. The individuals we honor this year are no exception.
This year’s EOY program participants have succeeded through turbulent economic times and emerged even stronger. As they forged ahead, they may not have listened when told it couldn’t be done, and they continue to take chances that average people consider too risky. They are leaders rather than followers. We are inspired by their achievements.
As we look toward tomorrow’s entrepreneurs, join us in congratulating the leaders of today, the innovators that have achieved their American dream. The following pages highlight those individuals who pursued this coveted distinction.
Congratulations on your continued success.
ALAN GREENWELL is program director for the Entrepreneur Of The Year South Central Ohio & Kentucky awards.