Manage your growing pains

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Internal Revenue Service issued temporary and proposed regulations to eliminate the requirement that employers send copies of potentially questionable Forms W-4 to the agency. In the past, employers had to send to the IRS any Form W-4 claiming more than 10 allowances or claiming complete exemption from withholding if $200 or more in weekly wages was expected. The agency said it will step up its withholding compliance program by making more effective use of information reported on W-2 wage statements to ensure that employees have enough federal income tax withheld.

Old Dominion Freight Line has been recognized as one of the “100 Best Companies in the United States” by investment-research firm DeMarche Associates. The program, launched four years ago, recognizes U.S. companies for operating performance that significantly improves shareholder value.

Gulf Oil and Wright Express have entered into an agreement to offer flexible pricing to Gulf commercial customers at its locations through a Gulf co-branded Affinity card program. The program features the full functionality of Wright Express’ Affinity program, enhanced with pricing options that include cost-plus volume-based contract pricing and discounts at Gulf locations.

Donaldson Co., a Minneapolis-based provider of filtration systems and replacement parts, announced that the company’s board of directors has authorized the repurchase of up to 8 million common shares.

In these days of premium freight rates, most trucking companies could – and probably would – grow if they could recruit and retain drivers and other essential employees. But there likely are other reasons not to grow. Don’t overlook the notion of sustainable growth – a company’s ability to expand safely while keeping reasonable control and balance over its assets, debt-to-equity ratio and creditworthiness.

Richard Voreis, president and chief executive officer of Marquette Funding, has seen growth companies from both sides of the banking equation: traditional banking and nontraditional lending. Voreis began his career at a traditional banker making loans to trucking companies before finally joining Marquette, a major nontraditional lender to the trucking industry.

“Sustainable growth is a major concern on one side, but less so on the other,” Voreis says. “That’s not to say it is not important to nontraditional lenders – just that the security interests make the difference.

So what are good, healthy annual growth rates? Voreis believes that smaller companies often can sustain 20 to 25 percent for a limited time, but he qualifies that estimate by small amounts, generally $5 million to $10 million annually. Larger companies might do well to grow safely at 10 to 20 percent annually on a sustained basis. Just about any lender will be uncomfortable with growth rates exceeding 40 percent.

“This is because the limits on your growth are not just financial, but also are operational and managerial in nature,” says Voreis, who has seen companies grow quickly in power units and thus revenue, but not grow in management and staff infrastructure. “Cash gets tighter, vendors stop being paid, and you often see the IRS deposits get skipped” – and after that, it can be difficult to recover.

Voreis has seen companies face significant losses by stretching the billing staff as the company grew. “I’ve seen accidental double-billing by rushed staff trying to keep up. This later comes back to haunt the company when the billing is discovered. They’ve had money advanced, spent it on new truck down payments, and now must pay it back.”

Voreis explains that in banking, there is more focus on gaining a security interest in real estate, equipment and receivables. “They really like to see forward-looking projections, and then measure your ability to meet them – a good track record in doing so creates value,” he says. But bank-based lenders often feel that growing too fast can endanger the entire company.

Traditional banking also is concerned with other issues related to sustainable growth, such as how often management salaries and stockholder distributions are paid out. “Don’t be overly generous,” Voreis says. “Salary, distributions and owner benefits will be subject to financial covenants, in addition to limits on capital expenditures.” The key to keeping sustainable growth high is reinvestment of profits into the company – and lower owner withdrawals.

Banker financial spreadsheets, like Moody’s, are used to project multiyear trends and make further projections based on management’s plans. These sophisticated tools include a calculator to project how fast the company can grow safely.

Nontraditional lenders, such as asset-based lenders, generally lend on the basis of the collateral, or some combination of cash flow and collateral. This is because in a pinch, they will get paid by collecting the receivables, perhaps in a lockbox arrangement. Because of this, they can look more favorably on fast growth plans.

Traditional lending generally is 2 to 4 percentage points less expensive than nontraditional lending, but both have their place. More modest growth companies will favor banking, and more aggressive growth companies usually must seek nontraditional lenders. Acquisitions and turnarounds are two prime examples: In an acquisition, bank financing can be outstripped quickly, making receivables-based lending the answer; and in turnarounds, the risk appetite of banks often is left behind quickly.

Whatever your growth mode, sustainable growth is more than just a concept – it is a reality that management and all types of lenders must accept.

Resources

“How Fast is Too Fast?” by Charles W. Kyd: website.

“How to Calculate the Sustainable Growth Rate”: website.

“To Factor or Not to Factor,” Chapter 12 of “How to Manage Cash Flow” by Kenneth C. DeWitt & E. Bryan Finison Jr.: website.