A good banker always has your best interests at heart and can provide advice and assistance for accelerating growth. Commercial bankers provide a number of services including deposit and check processing, cash flow from lines of credit, loan facilities for capital improvements and equipment, advice and assistance in currency transactions, import/export and other foreign situations, and financial business advice.
Recently I spoke with several middle-market and community bank commercial lenders and asked what they look for in a well-managed, bankable company. The results were consistent and fell into three key areas.
The Ideal Business Owner
Above all, bankers want owners and managers who:
- Are honest, realistic, and provide accurate information
- Are knowledgeable of their business and their industry
- Have a clear strategy and a strong team to implement it
- Spend their time on business growth, developing relationships, and developing their brand
- Are good at the basic blocking and tackling it takes to run the business successfully and provide a stable, growing business
- Have a strong succession plan, and are effectively working themselves out of a job so they can eventually exit the business without it coming to its knees
Show Me the Balance Sheet
Many businesses I get involved with focus extensively on the income statement and tend to keep their margins consistent across the entire product line. Bankers, however, would like more focus on the balance sheet, which provides a snapshot of assets and liabilities at a particular point in time, with an emphasis on cash flow. Bankers want the management team to understand how to keep cash flow strong. For example, many companies try to balance weak accounts receivable management by paying their suppliers slowly. Unfortunately those suppliers provide the very lifeblood of the organization – raw materials – that are needed to deliver more revenue and profit.
The cash to cash cycle (accounts receivable days + inventory days – accounts payable days) is a good measure of asset management. Most bankers want to see a number well below 100 days. In my experience with manufacturers and distributors, well-managed companies are below 60 days. In addition, bankers don’t want owners to withdraw too much cash for their own purposes, which puts the company in a weak position.
A banker’s ideal company also focuses on managing what’s known as the “current position.” The balance sheet shows both short-term and long-term assets and liabilities. The time frame to change from one to the other is typically a year. If a company has a loan (long term debt), there’s a current portion and a long-term portion. If there’s inventory, there are current portions and long-term (often obsolete) portions. Bankers don’t want credit facilities such as revolving lines used to manage long-term balance sheet items. This also involves the quality of the assets, which includes things like slow receivables, slow payables and slow inventory. Executives should make sure there are good internal controls in place and that the balance sheet is well managed.
Bankers observe how executives manage company capacity, and assess the company’s ability to quickly grow (or shrink, in a planned response to a down turn or recession, for example) as desired. Bankers watch the level of fixed costs in a company and see strength in the ability to grow with little additional capital.
They also want to see minimal concentration of revenues in a small number of customers. While it depends on the nature of the business and how much leverage is required to serve these customers, bankers often like to see less than 10% of revenue come from any one customer. Finally, bankers want to see things well maintained, including buildings, machinery and other infrastructure. One could argue that employees should be well maintained as well, with good benefits and training.
To accelerate profit and growth, use the Executive Command Center – speed, cash flow, capacity, profitability and agility to develop a well-managed company, one that any banker would love to have as a client. What is your company doing to strengthen your partnership with your banker?
© 2014 – Rick Pay – All Rights Reserved.