Beware of the smiling banker requesting a forecast - its a trap!
Well perhaps its not intended to be a trap, but by jingos it could be if you get it wrong. Tell the bank you're going to do $100,000 sales and you only do $80,000 then you look bad. The fact that you only did $70,000 the year before is forgotten. You predicted $100,000 and you didn't achieve it, hence you have put into doubt confidence in your grip on your clients, your market, your product and your finances. The same can be said if you predict $80,000 and you achieve $100,000, but your banker are less worried here because at least you can pay your debts!
But forecast concerns don't just stop at your ability to predict demand for your product and your ability to contain enthusiasm for spending money. Your forecast also needs to give a realistic picture of your cash flow, and this is driven by balance sheet as much as profit and loss. Its all well and good predicting profitable trade but if your debtors and inventory blow out, then your skills as an operational and financial manager are again put into question.
Pearl Financial Services have just released a checklist (click here) that businesses can refer to when preparing their forecast. This checklist is designed to help you consider all the aspects of the forecast hat a bank will be looking at and will go a long way to keeping the bank happy. It might even save you the trauma of submitting a poor forecast, and the hundreds of hours spend curtailing to the bank that ensue as you start to miss targets!
Wednesday, June 30, 2010
Monday, June 28, 2010
3 Days to Tidy your Accounts
Any business with Business finance facilities from a bank will know that 30 June in Australia is the day your performance is judged by your bank. Business needs to ensure that as at this date the balance sheet shows the best possible Working capital position available.
This means chasing debtors hard, and keeping inventory as low as possible. No stock refills or orders to be made until 1 July!
The bank measures cash flow as the movement in debt. The more cash the business can produce by collecting debtors, minimising inventory and pushing out Accounts payable, the better your year will look in the eyes of the bank.
Your risk grade will also be advantaged as liquidity and working capital ratios are included in assessment. Risk grade = loan pricing. Focus on getting your risk grade down and you will see reductions in your interest costs.
For any other bank relationship assistance, please don't hasitate to contact Pearl Financial Services.... Happy new year!
This means chasing debtors hard, and keeping inventory as low as possible. No stock refills or orders to be made until 1 July!
The bank measures cash flow as the movement in debt. The more cash the business can produce by collecting debtors, minimising inventory and pushing out Accounts payable, the better your year will look in the eyes of the bank.
Your risk grade will also be advantaged as liquidity and working capital ratios are included in assessment. Risk grade = loan pricing. Focus on getting your risk grade down and you will see reductions in your interest costs.
For any other bank relationship assistance, please don't hasitate to contact Pearl Financial Services.... Happy new year!
Thursday, June 17, 2010
Drive Bank Competition; Shop your Bank
It is well documented that banks are not [easily] providing loans to new Small Business Customers. What I do observe however is that banks are fighting hard to retain the customers that they want to keep.
This got me thinking. If more attractive businesses threaten to leave their bank, unless pricing comes down, then banks will start to feel profitability stress and this will force them to open up their doors to more new business applications.
As a general rule of thumb, a banker needs to write 25% of new business each year just to maintain the portfolio at the same level - ie loans will generally amortise down or move to a new bank every 4 years.
If existing customers also push for price decreases, then this puts further pressure on bankers to meet their profitability targets as the effect is that they will need to write significantly more than 25% more business to stand still. This will impact on senior banker bonuses and this in turn, will put more pressure on Credit to approve more new business.
Its not something that will change over night, but if enough good businesses do this, then it will slowly have the desired effect. In the meantime good businesses will benefit from reducing borrowing costs and transaction fees!
Of course, if you are not an attractive banking proposition, then I would caution you about this strategy as the bank may just call your bluff! If you have doubts, then before you act obtain a Pearl Bank Check which will give you a feel for the likelihood of a new bank being interested in your business (and hence your existing bank being interested in retaining you!).
Please pass this article on to any business owner you know, and together we can improve competition for Small Business Banking!!
This got me thinking. If more attractive businesses threaten to leave their bank, unless pricing comes down, then banks will start to feel profitability stress and this will force them to open up their doors to more new business applications.
As a general rule of thumb, a banker needs to write 25% of new business each year just to maintain the portfolio at the same level - ie loans will generally amortise down or move to a new bank every 4 years.
If existing customers also push for price decreases, then this puts further pressure on bankers to meet their profitability targets as the effect is that they will need to write significantly more than 25% more business to stand still. This will impact on senior banker bonuses and this in turn, will put more pressure on Credit to approve more new business.
Its not something that will change over night, but if enough good businesses do this, then it will slowly have the desired effect. In the meantime good businesses will benefit from reducing borrowing costs and transaction fees!
Of course, if you are not an attractive banking proposition, then I would caution you about this strategy as the bank may just call your bluff! If you have doubts, then before you act obtain a Pearl Bank Check which will give you a feel for the likelihood of a new bank being interested in your business (and hence your existing bank being interested in retaining you!).
Please pass this article on to any business owner you know, and together we can improve competition for Small Business Banking!!
Monday, June 7, 2010
End your year with a bang!
With 30 June fast approaching, here are 5 tips that business leaders and finance managers should consider to ensure that Bank relationships are enhanced next financial year:
1) Maximise your working capital - for the next 3 years banks will judge the success of your year on the financials produced on 30 June. If you can make special effort to maximise gross margin, minimise operating expense, chase all the debtors you can, run down inventory levels and push out creditors, then you will ensure that your financials are showing as positive outcome as possible.
2) Fix up negative current ratio balances - if you have a current ratio (ie current assets over current liabilities) which is negative, talk to your accountant to see what you can do to make this positive prior to year end. Perhaps you have related party loans that are blowing this number out? Perhaps you have short term borrowings listed that are actually long term in nature (see No 3)?
3) Seek bank reviews for short term facilities prior to years end - where the business has large non current debts that are due to mature in the next financial year, the business will be required to post these debts as current liabilities. However if the bank can confirm that facilities will be rolled over for a further 12 months prior to 30 June, then the business may be able to retain these liabilities as non current. Speak to your Accountant about this and whether this is likely to impact you.
4) Provide your bank with a plan for the next year, including a budget - ensure that you are suitably conservative and that only calamity will prevent you from achieving the budget. Note too that this budget does not need to be the same budget that you are using to motivate and incentivise your team. Be detailed with your assumptions, and provide insight to the bank on how the business plans to tackle industry and economic challenges which are well pulicised and might be concerning the bank (refer to the article "business beware when preparing forecasts" for a forecasting checklist).
5) Confirm that you will meet your covenants - if you have a suspicion that you will not meet them, then find out early and incorporate this news into your budgetting process. By telling the bank proactively, you have the opportunity to control the messaging, giving the bank some comfort that whilst you aren't meeting their hurdle requirements, you are aware of this, and you have a plan to fix it.
If you would like a second set of eyes to look over your plans, ask your Accountant or ring Pearl Financial Services.
1) Maximise your working capital - for the next 3 years banks will judge the success of your year on the financials produced on 30 June. If you can make special effort to maximise gross margin, minimise operating expense, chase all the debtors you can, run down inventory levels and push out creditors, then you will ensure that your financials are showing as positive outcome as possible.
2) Fix up negative current ratio balances - if you have a current ratio (ie current assets over current liabilities) which is negative, talk to your accountant to see what you can do to make this positive prior to year end. Perhaps you have related party loans that are blowing this number out? Perhaps you have short term borrowings listed that are actually long term in nature (see No 3)?
3) Seek bank reviews for short term facilities prior to years end - where the business has large non current debts that are due to mature in the next financial year, the business will be required to post these debts as current liabilities. However if the bank can confirm that facilities will be rolled over for a further 12 months prior to 30 June, then the business may be able to retain these liabilities as non current. Speak to your Accountant about this and whether this is likely to impact you.
4) Provide your bank with a plan for the next year, including a budget - ensure that you are suitably conservative and that only calamity will prevent you from achieving the budget. Note too that this budget does not need to be the same budget that you are using to motivate and incentivise your team. Be detailed with your assumptions, and provide insight to the bank on how the business plans to tackle industry and economic challenges which are well pulicised and might be concerning the bank (refer to the article "business beware when preparing forecasts" for a forecasting checklist).
5) Confirm that you will meet your covenants - if you have a suspicion that you will not meet them, then find out early and incorporate this news into your budgetting process. By telling the bank proactively, you have the opportunity to control the messaging, giving the bank some comfort that whilst you aren't meeting their hurdle requirements, you are aware of this, and you have a plan to fix it.
If you would like a second set of eyes to look over your plans, ask your Accountant or ring Pearl Financial Services.
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