When businesses run out of cash, their relationships become tense. Buyers experience a decline in translation quality, less responsive project managers and more aggressive sales people. Here is how you can tell if a vendor is just experiencing performance issues or is in fact about to go out of business.
Take what happened to Alpnet, which was the second largest provider of translation services in the year 2000. At the time, the company was at the bleeding edge of localization practice and technology. Its vision of the future of localization was very close to the newest cloud applications that are available only today. In short, Alpnet was one of the hottest localization companies at the time.
Then money became scarce. Alpnet lost $5 on every $100 it earned in 2000. By the end of September 2001, it lost twice that number: $10 per $100 of revenue. Alpnet burned its cash at hand fast, going from $3.37 million in cash down to $563,000 a year later. Three and a half months later, Alpnet was acquired by SDL. Michael Eichner, then chairman of Alpnet, cited as the main reasons for the transaction: “financial condition and continuing cash shortage.”
Interestingly, SDL also lost money in 2001, but only about $2.1 million. And a year later it reduced the debt that it acquired from Alpnet from about $11 million to $3.1 million. By the end of year 2014, SDL had sold about $403 million in technology and services, generated a profit of $14.5 million and held $23 million cash at hand.
The main lesson from this story is that money matters. SDL did not grow only because of its services, technology or vision. Alpnet did not go broke because of its offerings. The difference between success and failure lies in how the companies managed their money. To be fair, the worldwide financial crisis at the beginning of the century made it easy for an innovative localization company to struggle. First the East Asian financial crisis hit in July 1997. The ruble crisis followed in August 1998. Then the stock markets in the Western world crashed in April 2000 and bottomed out only in October 2002. Many financial assumptions from the 1990 dot-com era simply stopped working. Localization professionals were still figuring out how to grow a translation business from a family business to a global organization.
Today, the dependency between financial management and success in localization is clear. For example, customers found it difficult to buy services and technologies from multiple disconnected SDL business units between 2010 and 2013. Employee ratings of the company on the anonymous review site Glassdoor were often negative during that time. The year 2013 was particularly difficult when SDL restructured its operations and lost about $37.8 million.
Then, by the end of 2014, the company made a profit of about $14.6 million and employees commenting on Glassdoor attested 83% approval of SDL CEO Mark Lancaster. Now 69% would refer the company to a friend. That’s the magic of positive cash flow at its best.
Performance or financial trouble
Cash flow planning can be very cumbersome and difficult. It’s not trivial, and the bigger the company you are assessing, the more complex it becomes. It is also true that you do not need to be an accountant or financial controller to get a basic idea of where a company stands. Two numbers reveal the picture:
• Cash coming in the next 90 days
• Cash going out in the next 90 days
You want to make sure that more money is coming in than is going out, at all times. To calculate incoming cash, determine the average amount of money that comes into the company’s bank account every day. From the balance sheet take the number in Accounts Receivable and divide it by your company’s average collection period, explained in the April/May issue of MultiLingual. Now multiply the amount of cash in per day by calendar 90 days.
To calculate outgoing cash, determine how much money the company will spend in the next 90 days. Be as precise as you can be. Include payments to vendors, salaries, sales commissions, interest payments, taxes, operational cost and anything else that needs to get paid. If you do not have access to this data, summarize all cost items that you can find on the company’s profit and loss statement for the last three months and make an educated guess. Understand that your analysis will only be as good as your guess.
To analyze cash flow, subtract the amount of cash that will be coming in over the next 90 days by the amount of cash that will be going out during the same period:
If the number is positive, you are in good shape. If it is negative, the company will need to make adjustments fast. For example, they can pay vendors later than usual, so that less money leaves the bank. They can also take a loan, reduce employees’ salaries, defer sales commission payments, lay off employees, chase late payments or call up customers and ask them to pay faster.
Larger companies often deal with more complexities, such as depreciation and amortization or the effect of exchange rates. Determining cash flow from the outside without detailed data can be hard.
In Alpnet’s case, however, the situation was evident. A quick calculation based on their public financial report for the third quarter in 2001 revealed that the company was likely to run completely out of cash before the end of the year. Alpnet paid out about $135,000 per day and expected only $8.8 million in cash income during the last quarter. This left them with 65 days before cash would run out. On December 13, 2001 Alpnet and SDL announced their merger agreement.