working with banks during tough economic times what every business owner needs to know about… ®...

Working With Banks During Tough Economic Times

W h a t E v e ry B u s in e ss O w n e r N e e d s To K n o w A b o u t… ®

©1981 – 2008 Allen E. Fishman®


What Every Business Owner Needs To Know About…®

©1981 – 2008 Allen E. Fishman®

Meet In Person With Bank Lending Officer

Don’t take the easy way out by discussing these matters on the phone

Personally meet the lending officer and the other key officers of the bank

Meet In Person With Bank Lending Officer

Use methods of creating good personal chemistry-use research bio info tools such as facebook.com

Prepare For Your Meeting

Be prepared before your face to face meetings with current and potential lenders

Develop a strategy for motivating your money source

Develop a strategy for negotiations with your money source

Concerns About Threats to Company

Be prepared to respond to concerns about threats to company projections

Have a strategy/plan to react to threats that are out of company control

Loan Denied Because Of Lack Of Preparation

A business owner had plans to invest $5MM in a new facility in another state. When asked what type of research he had done, the business owner answered glibly: My salesman told me “if we build it, they will come.”The loan was denied.

Your Sales Package

Easy to read business plan Don’t hand out written materials not

in the business plan unless you have to refer to items in the materials

Early In The Meeting

What do you want the deal to be Explain how the company is valued Explain how you determined the

valuation of your business Who owns what shares or

percentage currently, and what did they put into the company in return for those shares

Speak Their Language

During a meeting with her banker, the owner of a manufacturing company was asked by the banker how much her business made last year. Her answer was over “$600,000.” It turned out that this was the company’s gross revenue. The loan was denied.


An income statement – measures the operating net profit or loss (difference between revenues and costs) for a reporting period

A balance sheet measures the net worth (difference between total assets and total liability) at the end of a specific period


Working Capital refers to your current assets less current liabilities Example – Current assets - $500,000.

Current Liabilities - $300,000. Working Capital - $200,000

The business needs working capital to fund its short term obligations

Speak Their Language Current assets include such things

as cash, marketable securities, accounts receivable and inventory

Current liabilities include such things as accounts payable, accrued expenses and payments on notes payable that are due within the following year

Speak Their Language Accrued expenses represent

obligations of the business at the end of the accounting period, such as utilities, interest, salaries and taxes


Accounts Payable – Amount you owe trade creditors on account Cost free financing Money sources are interested in the

timing relationship between how long it takes you to collect your accounts receivable and when your payments on accounts payable are made

Speak Their Language Inventory – merchandise held for

resale or materials used in production Know your inventory turnover rate as

compared to the average inventory turnover in your industry

Be able to explain the reason for inventory build ups

Money sources are concerned about obsolete or perishable inventory

Speak Their Language Financial Ratios are generally

classified into 4 groups: Liquidity ratios (current quick) Efficiency (accounts receivable days,

accounts payable days and inventory days)

Profitability (return on asset return on equity gross profit margin net profit margin)

Leverage ratios (interest coverage ratio and debt to equity ratios)

Key Financial Ratios - Liquidity

1. Current Ratio– Total current assets/total current

liabilities– 2.0+ - good; below 1.0 - poor

2. Quick Ratio Equals (cash + accounts

receivable/total current liabilities) 1.2-1.3 – good; 1.0 or less - poor

Key Financial Ratios - Efficiency

3. Accounts receivable days– Equals (Accounts Receivable/Sales) *

365– The lower the better

4. Accounts payable days– Equals (Accounts payable/Cost of

goods sold) * 365– The lower the better shows how

company is meeting obligations

Key Financial Ratios Efficiency-Profitability

5. Inventory days Equals (Inventory/Costs of goods sold) *

365 The lower the ratio the better

6. Debt to Equity ratio– Equals total liabilities/total assets– The lower the ratio the better

7. Gross profit margin– Equals gross profit/sales– The higher the better

Key Financial Ratios - Profitability

8. Net profit margin Equals adjusted net profit before

taxes/sales The higher the better

9. Interest coverage ratio Earnings Before Interest, Taxes,

Depreciation and Amortization (EBITDA)/Interest Expense

Higher the better; 1.25 or lower poor

Key Financial Ratios

10. Advertising to Sales Advertising expense/sales The number should be decreasing

11. Payroll to Sales Payroll expense/sales The number should be decreasing

Key Financial Ratios – Leverage

12. Return on Equity Net income/Total equity Higher the better

13. Return on Assets Net income/Total assets The number should grow the higher

the better

Key Financial Ratios: Leverage

Debt to equityTotal Liabilities 360 Total Equity 129 = 2.8Creditors like a lower ratio for reduced risk investor and they like a higher ratio for financial leverage.

Debt leverage ratioTotal Liabilities 360 EBITDA 138 = 2.6The ability to repay your debt obligations from an operating cash flow (EBITDA).

Company Financial Information

Money sources look for accurate and current information

Your financial statements should be reviewed by an accountant before presentation to the lending source

You Need to Know

Your current financials Profit and Loss Statement Balance sheet Retained Earnings statement Cash flow Statement

Profits/Losses And Sales

Your profit and sales this year compared to last year

Whether you are on a cash basis or accrual basisAccrual Basis Revenue is recognized when it is earned Expenses are recorded when they are

incurred

Trends

If company sales are growing at a faster rate than the sales of most other companies in the industry

How do gross profit and net profit margins compare to other companies in the industry?

Cash Flow

Net income from operations plus/minus: changes in current assets and liabilities (working capital) plus/minus: investing activitiesplus/minus: financing activities

Cost Analysis

Know your basic costs including:ManufacturingSellingDeliveryStorage and handlingService/supportOverhead

Resources That Will Lead To Improved Profitability

Be able to explain what resources will lead to improved profitability in the future, i.e. assets bought with the debt at 8% interest will improve future net profitability by 15% because____

Company’s Credit Worthiness

Relative to its industry, what is the company’s debt situation?

Be able to respond to credit worthiness factors such as Dunn & Bradstreet and credit bureau ratings

Owners personal financial condition will be considered

Sell Your Competitive Niche

Sell your idea and competitive niche as if the lenders were customers and you were selling them a product or service.

Additional Information required

Sales and marketing plan - how you are going to produce sales

How will the monies raised by used? Current management team

capabilities

Strategy To Accelerate Cash Collections

If your aging of accounts receivables is bad, be prepared with a strategy to accelerate cash collections

I.e. Discount program offered for early payment by customers i.e. Due in 30 days but 2% discount if

paid in 10 days

Inventory Management

Be prepared to discuss key factors such as: Impact of expected sales Seasonal considerations

If inventory turn is bad be prepared with a strategy to reduce inventory carrying costs i.e. improve cash flow by heavily

discounting slow moving products Story – shoe distributor

Inventory Management

Be able to explain why your inventory control is strong and the steps you’ve taken to guard against theft loss

High back-order level is sign that higher inventory balance should take place

Higher inventory lowers loss of sales from stock outages but increases chances of lower sale ability with dated merchandise

Tools To Track Cash Explain the tools you use to track

cash needs on a daily basis, how much your business has and where the cash is kept

Show how the bank can benefit from your depositing or investing with them excess cash not needed short term

Forecast Cash flow Explain or have a professional with

you to explain your forecasted cash flow

Forecasting assists you in ensuring timely debt repayment

Excessive Cash Balance

Excessive cash balance looks bad if you are not earning interest on the excess funds

Banks typically don’t place much value on excessive cash balances because they can easily be removed by the owners

Cash Management Questions to Ask Your Bank

What procedures exist for quick deposits of checks by the bank into your accounts for credit? e.g., remote deposit To answer these questions, the bank

will ask you the source and location of your company receipts

Cash Management Questions to Ask Your Bank

Can you use electronic transfer for customer payments/electronic deposits?

Can the bank lower your credit card fees if applicable

Will the local bank collect from these boxes during the day and deposit into the corporate account?

Your Credit and Collection Policy

What is your policy-amount and terms offered relating to customer credit?

The balance act-tighter credit policy lowers sales/reduces bad debt losses

Your Credit and Collection Policy

How do you evaluate the credit worthiness of potential customers?

Danger-Sales people are often eager to make the sale and will push to extend credit too easily

Your Credit Policy

Credit policy of your business may be based on many factors such as: Credit rating of customer Type and size of customer Profit margin of product or services

How often do you review customer financial health to revise credit limits?

Collection Policy How fast do your billings get out? What is your timing and process for

turning over delinquent accounts to collection agencies?

IT Security And Backup Be able to explain the security and

storage for your computer system and data

Break Even Point

Explain where your company is relating to “breaking even” point

What sales volume and cost factors is needed to cover your costs so that there is zero loss?

ProfitCents® Provides a detailed financial picture

in a format geared towards bankers Provides comparisons to industry

benchmarks Provides insight into how you can

improve your business and your ratios

Peer Board Membership Is Considered Valuable By Lenders

Benefits of outside advice from peer board and what membership brings to company

Benefits of coaching

The Credit Officer’s Viewpoint

They are not owners Upside: the loan gets paid off Downside: charge-off Paid to look at the downside Borrower tends to look at the upside


The 5 C’s of Credit: Character Capacity Conditions Capital Collateral


Character Willingness to pay back the loan How does their personal credit look? Are they honest and forthcoming? Do they understand their cash flow?


Capacity Ability to pay through cash flow How much debt vs. equity on the

balance sheet?


Conditions What is going on in the economy? What is going on in your industry? How are you mitigating your risk? How are you as a risk manager? How are you managing the downside?


Capital How much skin do you have in the

game? Easy to walk away if you don’t have it Secondary source of repayment If weak primary source – e.g., thin

margins – need better secondary source


Collateral Banks are the worst liquidators This is their lowest priority Regulators require banks to write this

down


There is plenty of capital available Problem is companies are looking

worse due to the economy Retail industry is seen as a concern

coming up


Their cost of capital has gone up Banks are passing along rate

increases Commercial loans – trying to keep

maturities shorter Will do longer loans but their cost of

capital is higher – so your rates will be higher


H AVE A PLAN AN D BE PROACTIVE

©1981 – 2008 Allen E. Fishman ®


HAVE A PLAN AND BE PROACTIVE

©1981 – 2008 Allen E. Fishman ®

working with banks during tough economic times what every business owner needs to know about… ®...

Documents

business owner needs

business andexplain

company control

company projectionshave

manufacturing company

business plandont hand

money sourceterm of

face meetings