When I was little, first grade to be exact, I remember being the first in my class to fill out the multiplication table worksheet and winning a prize. I didn't have to work out the problems, because I figured out the pattern and sequence of the numbers. I remember instinctively being so competitive to beat everyone else, and physically being stressed to make it happen: sweaty palms, heart racing, and stomach in knots because I had to be first. Silly, I know.
As I grew up, that feeling faded. I wanted to fit in, and the goal was to not be recognized. I noticed pretty early on that female students were expected to be good at reading and English, while the male students were supposed to flourish in math and science. So, I played the part. I've always been into words.
Fast forward 24 years later, I sat in a hotel conference room today and the familiar feeling crept back in as I was calculating a spreadsheet by hand for a company's balance sheet and profit and loss statement. I had to be first. I had to be right. And it felt so good to win. I had forgotten how much I actually enjoy crunching numbers.
Now, don't get me wrong, when it was time to calculate the company's Operating Cycle and Ratio Analysis, my head started to hurt a little. But at the end of the day, I had a blast learning about credit analysis.
We spent most of the morning discussing the role of an economic development finance professional, various economic development approaches to financing, and ways to reduce costs to make deals happen. The trainer, Sheldon Bartel, is nothing short of a credit analysis genius. He moves fast, and expects us to keep up. I learned more today than I have in the seven years since graduate school.
I am fortunate working for the City in that I have a team of extremely talented finance professionals no more than a staircase away willing to help me assess any opportunity that presents itself. None the less, I want and need to learn the basics of economic development financing so that I can help provide businesses with access to low cost long-term capital, incentives, and the infrastructure and amenities necessary to succeed.
Mid-morning we discussed several approaches to reducing development costs, reducing costs of capital, making capital more readily available, decreasing operating costs, and attracting outside equity. I've picked up most of this over the few years that I have worked with the SBDC in Atlanta, and with Jerry on projects in Texarkana. Fortunately, I've had firsthand experience with all the creative finance tools available through the Grim Project, so it was easy to use a real world example in today's discussion. The Grim is quite the anomaly, with so much public support and such a huge impact on our community, so it isn't the perfect project to run through economic development credit analysis. Still, it's better to work with a real project than an imaginary one any day.
Bartel went on to highlight how to calculate Return on Investment (ROI) and Return on Equity (ROE) and the need for equity capital. After a case study, he explained why it was so important to help small-medium sized businesses access the kind of financing they need. For instance, according to the Small Business Administration, small-medium sized businesses created 40% of new jobs in the U.S. in the last two decades. The U.S. Census Bureau reports that 48% of all U.S. workers are employed by a small-medium sized business. Over a third (36%) of high tech workers, who make over $80K a year, are employed by a small-medium business. All that to say that small-medium businesses can create new jobs at one-tenth of the cost of new jobs created by a Fortune 500 Company.
It is absolutely pertinent to our economy to help small-medium sized businesses stay in business and stay profitable. Whether it be an issue of cash flow, expansion, or acquisition, it is often necessary for the economic development engine to become involved in order to ensure success. My job will be to make sure the deal is feasible. Unlike a banker, I don't need to pursue profitability from lending, but need to ensure taxpayer's money is spent wisely, can be paid back, and hopefully will create more or better jobs in our community.
The rest of the day was spent discussing business development challenges (and solutions), and then moved in to the calculation of various components of a deal, such as debt service. We discussed the four C's of credit: cash flow, collateral, character, and capacity. We also talked about what economic development financing is, compared to what it is not. I'm going to list the specifics here, for posterity.
What EDF is:
-provides a business with growth capital necessary to reach its full potential by providing attractively priced financing that fills a financing gap.
-leverages private sector dollars in order to expand the amount of capital available to a small business.
What EDF is NOT:
-Duplicating existing private sector resources (we're not competing with the banks)
-Inducement packages to attract large plants
-Bailouts of failing businesses
-Grants
-High-risk capital for start-up companies
I'm sure all you readers already knew all that, but it doesn't hurt to remind the general public how these $$ that are set aside for economic development are intended to be used.
Then we dived straight into the credit analysis process and spent the rest of the afternoon crunching numbers. We worked out balance sheets and profit and loss statements by hand. Seriously, we did it the old school way, with pencil and paper and a calculator, and determined in several case studies if cash flow was greater than debt service. I've attached a few photos to prove that I did it, with my own hand. No computers were involved in the making of these spread sheets:
There you have it-- A full day of credit analysis is in the books. I might have geeked out a little, but I kept my head above water and even made some friends with some kind folks from Waco. I'll keep you updated, as I'm sure exciting things are head in Day 2 of Credit Analysis from Phoenix, Arizona.
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