Monday, September 16, 2019

Lesson learned: 'Watch your balance sheet like a hawk,' CFO says


Amplify Credit Union's CFO John Orton argues your income statement won't give you the heads-up you need when sales drop and debt service obligations start to mount.

In the aftermath of the September 11 attacks, John Orton's fast-growing business took a nose-dive.

He was part owner of a private equity-backed company that was going around the country acquiring antique malls and using increased sales to service its expanding debt load. But consumer interest in antiques, a discretionary purchase that tends to do well when people are feeling upbeat and confident, waned in the uncertain and fearful environment that followed the attacks and pushed his company into bankruptcy.

But Orton, the long-time CFO of Amplify Credit Union in Austin, Texas, learned a lesson from his earlier company’s struggles. That lesson has helped him be a better finance executive, he believes.

“We thought we were on a trajectory for an IPO at some point when roll-ups were a little more in vogue,” he said in a CFO Thought Leader podcast last week. “Aside from the national tragedy, we saw in the months after 9/11 our sales fall by half. We had leases going up. We had debt payments due on our mergers. So, it put our business into a tailspin. The world went from rose-colored glasses to a chapter 11 filing within four years.”

His mistake, Orton said, was his focus on the income statement almost to the exclusion of everything else. What he should have been focusing on just as much was the balance sheet, because that would have alerted him to trouble down the road in the event of a fall in sales.

“We were very focused on delivering income, and EBITDA, and sales growth, and consummating mergers to keep our venture capital partners happy, grow the business, and try to get bought out or go to an IPO,” he said.

“So, the way we looked at the balance sheet was an afterthought. What snuck up on us was, as we were going past 2001 and into 2002 and 2003, we had a lot of debt service coming due on acquisitions that we’d done in the years prior, and so that, plus a 12% yield to our VC investors, really created a situation where we had a high fixed-cost business.”

Orton said that, had he been more forward-looking, he would have seen his debt service doubling and tripling over the following few years and that was unsustainable in all but the most optimistic scenarios.

“You have to watch your balance sheet like a hawk, and not just your current commitments,” he said. “If I had been more forward-looking, I would have seen in 2002 and 2003 that my debt service was going to double or triple. I think we were under the illusion that, as the business continued to grow and succeed, all the debt service would be taken care of by sales growth, and when that didn’t materialize ... wow, we were upside-down in a hurry.”

Orton said the company emerged from Chapter 11 bankruptcy protection in a relatively good position, in part because of the company's decision to be open about all aspects of the process. “It took about nine months to get through that,” Orton said. “Only about 20% of companies that enter Chapter 11 successfully exit. I actually went around to our different sites, put on roadshows with our employees and key customers right after the filing, and provided monthly updates to them. I think that open line of communication kept a lot of key customers from leaving.”

Early lesson in accountability

Orton credited his appreciation for openness to two negative experiences he had when he first started out in business in the early 1980s. In an early job out of college, at Arthur Andersen, where he worked as a COBOL computer coder, his manager was so frustrated with his performance he threw a book at him and walked out. “It was about 11:30 at night and we were the last two people there,” he said.

In his next job, this time working in the finance department, the company, saddled with a massive inventory problem, instituted widespread layoffs in a heavy-handed way that left a sour taste in employees’ mouths. “No notice, no severance, no nothing,” he said. “It made me realize you can be successful in business without being a jerk.”

Orton says he tries to make openness a characteristic of everything he does and he thinks it’s been a major part of any success he’s had over the years.

At Amplify, when Orton came on board, around 2006, the company had about $300 million in assets. Today, it’s at $1 billion, making it one of the larger credit unions in the country.

During that time, the company has shifted, as most financial institutions have, from a bricks-and-mortar focus to an online and mobile focus.

“It’s been a very digital-first approach for us,” he said. “Boring banks and credit unions by necessity are having to become much more technically oriented.”

He said he works with Salesforce on its CMS, a company called Fiserv on its core banking applications, and a company called Q2 on its mobile applications — this last one a must to stay relevant to millennials. “You can check your deposit balances, your loan application, and you can even do a loan application on a mobile device and we can push notices to you if your account balances get below a certain level,” he said.

Amplify had some 90 applications tied to its core system when he started and now the goal is to whittle that down to about 30 so it’s more manageable, better integrated, and easier for everyone to learn.

“We used to take more of a best-of-breed approach no matter what the application was but then you end up with IT systems that are pretty unwieldy,” he said. “That is a lot of vendors to manage, a lot of training for new employees. We decided that, an application that meets 80% to 90% of need, but maybe slightly short of best-in-breed, but integrates better, is just a better long-term solution for us, easier to manage, probably lower cost, and hopefully, since it’s integrated, easier to use for our customers.”

His role in this process has been to review and negotiate contracts with the vendors, and then track whether the technology is having the results the executive team wanted.

“I’m known as the accountability guy that looks back at ROIs on investments and says, ‘Well, did we achieve the customer growth that we expected to see? Did we see the loan or deposit growth? The increase in service offerings? The number of products per household?' So, I’m the guy who follows behind these investment projects to make sure we’re getting the results we expected, and if not, I want to know where we got off track and what we can do to deliver the investment returns we were expecting.”

The company is hoping the technology will enable it to keep competing even as its competition changes. In addition to other credit unions and community banks, it’s competing against newer online players, like Ally and Marcus.

“A lot of our customers are looking at our rates and looking at those [online players] and in some cases saying, ‘Can you match what I can get at Ally for this two-year CD?’” he said. 

A role for RPA

Going forward, robotic process automation (RPA) is expected to play an increasing role in his company. He’s using it to automate repetitive accounting and finance tasks.

“In the accounting world, we’ve all done reconciliation at some point in our careers and it’s a pretty mundane, low value-add task,” he said, “but you can now — and we’re doing this at Amplify — deploy software that will take sets of numbers and look for commonalities and reconcile the deviations and then at the end of the process, if they can’t perfectly reconcile the account, it’ll spit out the open items to be reconciled, and then you can add human value at the end. So, I see a lot of potential for us.”

The next deployment for RPA will be in loan application processing. “We can have software scan loan apps and summarize information and be given an initial recommendation on a loan,” he said. “And then we would have a loan officer look at that, and if everything looks good, check the box, and the loan is approved for funding. So I think in our industry and certainly others, RPA is going to play an increasing role and to me that’s exciting.”

One bit of advice Orton had for young finance executives is to get out of their comfort zone and get training in communications, including public speaking, because as much as finance skills are important, so is being able to tell the story of the company, because that’s what builds trust.

“As finance people, we tend to be introverted, but it’s important to be good communicators,” he said.

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