Getting financial support from a bank needn’t be the mysterious quest it is for many Australian businesses. Even in these tight economic times, the task can be greatly eased if a business owner learns how to speak a bank’s language and use similar risk-management tools and techniques.
From my lofty observation post of 25 years in senior roles in the banking industry, it is apparent that one of the most important but overlooked components of any business is its finance structure and its relationship with its bank.
Think of all the key ingredients that make up a good business:
- Management: A critical component and difficult to get right
- Labour: More readily available and replaceable than high-level management
- Supply chain: Important, but ultimately replaceable in most cases
- Equity capital: Always in short supply, and returns must be maximised
- Bank financing: A business can’t survive without a healthy two-way relationship
To complicate this, much of the banking world is in unchartered waters due to the global economy coming off extended periods of prosperity. Change is constant, but seemingly more constant today.
Respected finance journalist Alan Kohler said in a recent article:
“Small businesses used to be able to finance new equipment on a hire purchase deal over three years, unsecured, or vendor finance backed by a bank. Now they just can’t. It means they’re at a severe disadvantage to large competitors who can fund expansion internally or can easily get a loan from today’s scrooge banks.
“So the lack of competition in banking is going to lead to a lack of competition everywhere, as the small players are sidelined by their lack of access to capital”.
A bank’s credit department and relationship managers make decisions based on facts available to them at a point in time.
Their ultimate responsibility is managing risk on behalf of shareholders. As such, they tend to default to a conservative position unless they have sufficient supporting information to say “yes.”
The business community knows it is more common to get a “no” than a “yes,” so there is a gap between what a bank delivers and what customers expect and need. Add to the puzzle the fact that many relationship managers have not been exposed to today’s adverse trading conditions and there is massive potential for the gap in mutual understanding to become a chasm.
The solution: Timely presentation of the business’ facts in a way that keeps the bank fully informed and in a manner it can easily digest, interpret and understand.
The vast majority of Australian banks use the same base software modelling as a core risk management tool. By using the same tools as the banks, business owners can present their case in a form that will smooth out the risk assessment process and go a long way to close the knowledge gap.
This diagnostic process analyses performance history and highlights key ratios that can be benchmarked against industry and peer performance. The full value of this “see it through their eyes” approach, however, lies in the software’s ability to forecast performance.
Business owners and relationship managers can perform “what If?” analyses that identify the bottom-line impact of any changes to key drivers. For example, a company wants to grow revenue by 10%. However, after running the diagnostic model, it’s determined that under the business’ current operating rhythms, achieving this will drain cash and working capital (it is at this point that the bank may ask for more equity). It becomes a counter-productive aspiration unless other changes are made to business operations.
- Other areas that can be put under this scrutiny:
- Working capital management
- Profitability and cash flow outcomes from changes to operations
- Returns on capital employed (equity and debt)
- Assessment, implementation and monitoring of growth and acquisition strategies
- Interest cover and compliance management of all bank reporting covenants
These components can be subjected to stress tests and monitoring as fresh financial data becomes available (such as monthly management reporting). Decision making becomes fluid and virtually instantaneous. A dashboard reporting system assists in tracking performance against the business’ goals.
An approach to improving the bottom line
Now that you have the tools to truly communicate with banks, how do you develop the information the banks need? Well, this will sound like Business 101. However, through a combination of pulling back to the basics and employing technology, it is possible to simplify the process of improving business efficiency, profit and bottom-line cash.
Step One: Understand your business
- What markets are you in and what products and services do you provide?
- What is your competitive position and what market advantages do you hold?
- What drives your cash flows?
- Where do you really make your money?
Step Two: Run a full diagnostic of business drivers at a micro level
- Sales and marketing
- How much cash does your business really generate from its operations?
Step Three: Review your objectives and goals in line with diagnostic review results
- Dare to dream – what does it look like?
- Identify areas for improvement and run “what if?” scenarios consistent with your goals
- Identify “quick fixes” and critical areas that must be addressed now
Step Four: What are the realities?
- Review the scorecards and dashboards
- How is your business really performing?
- What roadblocks are in place that will limit your ability to achieve your goals?
- How can you leverage the positives in your business?
- As a consequence of the findings so far, how strong is your relationship with your bank?
Step Five: How to achieve your desired financial health
- What drivers can or need to be changed?
- Maximise your return on capital
- Maximise your profitability and cash flow
- Other Priorities
Step Six: Implementation, delivery and monitoring
- Implement the critical findings from Steps Three to Five
- Present the change program to your bank to get its buy-in
- Do a quarterly follow up to monitor the process and changes required to meet goals
Taking the earlier example of the company that aspires to grow by 10%, this can be achieved profitably and with a positive contribution to the cash flow by adopting the above process. It may mean the business needs to tweak a couple of key drivers, but the business owner now has an overview of the critical factors driving the business and is better informed to make decisions. In this example, consider some potential outcomes:
- The business may be able to achieve its revenue growth, but must make some changes.
- It may be better off by setting aside aggressive goals and staying up.
- It may be able to produce better returns on a reduced turnover.
Such are the vagaries of business, but the good news is that with the employment of technology, businesses are in a better position to arrive at the right decisions.
What is “Bank Ready” and why is it important?
Let’s take this one step further. Your business is now empowered with greater knowledge in assessing its operating efficiency and is in a better position to meet its goals. “Bank Ready” simply refers to being a bank customer in a position to provide timely information in a form the bank can easily understand, interpret and digest. It is taking the guesswork out of the process and ensuring your bank fully understands your true risk profile.
The example we have used is instructive. The company growing by 10% will produce forecasts in line with these goals and have a set of base assumptions. Two problems often arise. First, the information is mostly static and difficult to update — the bank is always playing catchup and its decision-making can reflect that. Second, change is always a difficult story to tell and most business people have had issues convincing a bank of the merit of their plans. This goes to the heart of Bank Ready.
The technology outlined in the steps above can be used in a report that is essentially what the bank will use in its risk-profile assessment. So Bank Ready simply means helping the bank to do its job better by being more prepared and speaking the same language. Streamlining the process through fluid information that reflects the current performance of the business makes you Bank Ready. Taking away the smoke and mirrors makes you Bank Ready. Helping the bank to say “yes” depends on you being Bank Ready.
Peter Chambers has more than 25 years of experience in the banking industry in relationship and executive roles. He works as a consultant to the SME market, working side by side with business owners and managers to deliver and maintain bottom- line improvement and helping small businesses enhance working relationships with financiers. Chambers can be contacted at [email protected] or at 0437 503 504.
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