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Debt Compliance 101: Keeping Your Banker Happy

keep your banker happy

While Houston is mostly underwater from Hurricane Harvey that made landfall over the weekend, we are keeping our heads high and finding some purpose. Houstonians are going out of their way to save people, help clean up flood damage, and providing the necessities for their fellow neighbor. Similarly, you should find ways to keep your banker happy. They need certain things from you that only you can provide. One of the biggest ways you can keep your banker happy is by staying in compliance with your loan covenants.

What is Debt Compliance?

Debt covenants are used to protect the bank by implementing measures to ensure the bank gets paid at the end of the day. Business Dictionary defines debt compliance as “legal measures taken to ensure that borrowers repay their debts.” If you stay within the confines the bank has set, you most likely will not hear from the bank. But if you float between compliant and noncompliant or are simply noncompliant, you will face some consequences. Debt compliance is one of the best ways to keep your banker happy.

Floating between debt compliance and noncompliance? If this is you, then you need to free up cash within your business soon. Download our A/R Checklist to effectively collect your accounts receivable and manage your cash!

keep your banker happyNot Being Debt Compliant

Not being debt compliant means that you have broken debt covenants. But what exactly does that mean? Your bank, in the worst-case scenario, will call your loan. If being noncompliant is not a pattern for your company, banks do not generally want to take this route. Instead, they will likely freeze your credit line and you will need to survive off only the cash flow generated from your company’s operations. Just like Houston prepared for the worst-case scenario with Hurricane Harvey, you have to prepare like that too because the worst case might be the reality.

Keep Your Banker Happy

A client once told us that business was great. They tried to convince us that their Q1 numbers were looking good and would  still allow them to have healthy debt coverage ratiosBut their banker wasn’t so sure. Oftentimes in business, we look at just a sliver of information when we report the news – good or bad. But to protect themselves, the bank looks at a wide array of information. Their banker wanted more information and financials to ensure his confidence, even though the company reported reasonable Q1 numbers.

Maybe you are like our client, and you are experiencing misplaced pressure from your banker, or worse, perhaps your banker is putting pressure on you for good reason. As financial consultants who facilitate the relationship between a company and its banker every day, we know this dynamic very well. There are a couple things that you can do to keep your banker happy. These include considering your banker’s perspective, asking what they need, getting busy, and consistently checking in with your banker.

Consider Your Banker’s Perspective

Perspective requires effective communication skills and the ability to listen to what they are seeing from their viewpoint, not yours. If your local economy is encountering uncertainty, your banker is going to be more sensitive not just to your business, but to his or her entire portfolio. Even if your business is doing well, he or she may be facing pressure due to funds lent to other companies that are suffering. It’s critical to provide your banker with the confidence that your business is either (1) a-okay or (2) prepared to get better.

How can you best do this? Provide all the information they need to know where you are financially. Then, provide a plan to improve your business moving forward, even if your numbers are looking great. This extra step helps ease the stress and pressure the banker is facing. By going this extra step, you will be able to build the trust of your banker.

keep your banker happy

Ask What They Need

Let your banker know that you are prepared to provide cash flow projections, debt ratios, and more. Ask what they need from you to feel confident. You can do this by asking the following question, “what do you need to feel good about our company?” But the key is you have to listen to what they need from you. Oftentimes, businessmen and women think that asking the question will result in some brownie points. Listen carefully to what factors in your business scare them, encourage them, etc. Remember, do not assume anything.

For example, a client once went to the bank to discover that it was really uncomfortable with his lack of reporting. This lack of consistent and accurate data required the bank to just take the owner’s word for the numbers. But in reality, the owner didn’t have a grasp on his business. We partnered together to create a more streamlined accounting and reporting process. As a result, the bank felt a lot more comfortable with them and were even flexible in crunch times.

Get Busy

The best thing you can provide your banker is evidence that the bank’s money will be paid back. You provide this assurance with a plan. We suggest you provide dynamic cash flow projections to your banker. (Keep in mind, this is not easy). Bullet point the operational strategies that the company is using to make these projections a reality. Also include some financial ratios like the company’s debt service coverage ratio. Collect your accounts receivable to increase the amount of cash in your business. If you need help with cash management, download our A/R Checklist here.

Check In

Be sure to follow-up with your banker once you have provided all this information. Let him or her know how the company is on track (or not) with the projections and what measures you are taking to ensure the company’s financial health. Generally speaking, if you follow-up before they ask for more information, your banker will feel safe about your account. Just like in marketing or sales, follow-up is key for success.

Banker’s Reputation

Your banker’s reputation depends on your company’s success. Their job is on the line just like your company needs the lent cash to operate. Help keep their heads well above the water (last Hurricane Harvey reference, I promise). For more ways to add value to your company, download your free A/R Checklist to see how simple changes in your A/R process can free up a significant amount of cash.

keep your banker happy

Strategic CFO Lab Member Extra

Access your Projections Execution Plan in SCFO Lab. The step-by-step plan to get ahead of your cash flow.

Click here to access your Execution Plan. Not a Lab Member?

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keep your banker happy

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Key Elements When Seeking Financing

key elements when seeking financing

This past week, one of my clients met with a banker to develop a new banking relationship. He hands the banker the company’s financial statements, expecting the banker to look at the income statement. Instead, the banker flips to the back of the financial statements to look over the balance sheet. As the coach, I asked my client, “See what he just did?” Most financial leaders (and the owners of their businesses) are consumed with their income statement but the banks want to know are more interested in how leveraged their banking client is. Not surprisingly, there are a few key elements when seeking financing for companies to follow.

Key Elements When Seeking Financing

Every company cycles through good and bad times. Depending on what part of the cycle your company is currently in, your banking relationship may be influenced. There are some key elements when seeking financing that will keep you on the good side of your banker.
Identifying your KPIs is a critical piece of the process when seeking financing. Want to find your KPIs and learn how to track them? Access your free KPI Discovery Cheatsheet today!

Leverage

What is leverage? Financial leverage is the use of borrowing from the bank to offset the cost of sales. Many companies hope to borrow just enough to increase their capabilities to sell more. But if banks see that you are too highly-leveraged, it’s bad news!

As a key element when seeking financing, leverage is important to have as it provides credibility to your borrowing experience. A banker will see that you have maximized the potential of previous capital to increase sales. The “kicker” here is if you have failed to optimize the borrowed capital potential, then the bank is going to be more prone to backing out of (or not starting in the first place) a banking relationship with you.

Cash Flow

We say it often and we say it loud… Cash is king. Without cash and/or liquid assets in your company, the bank is going to turn its nose up at you. Be sure to communicate the availability of cash in your company. For example, if a friend asked you for $250,000 but had no way of paying you back, you would be wary and decline the ask. This is because there is no hope that you will get the money back that you loaned. The bank acts in its best interest.

Make it easy for the bank to make a decision. Communicate through the financial statements (especially the balance sheet) the availability of cash.

Not About Price

Oftentimes, business leaders think that the bank cares about the price of your product. They don’t. To the bank, price is the least important factor in their assessment of your company because money is a commodity to them. Price is immaterial.

When meeting with a banker, communicate the bottom line and what’s on the financial statements NOT how you price your product. The bank is not your business consultant. They have to make money off of you.

Creating a Banking Relationship

When seeking financing, it is essential to create a banking relationship. You wouldn’t get married to the person you passed by on the sidewalk, so why would you get into a banking relationship with someone you have zero connection with. There are a few things that you need to look for to have a successful banking relationship.

What to Look For

If you are just starting out in a new city or have no relationships with any bankers, one of the first things that you can do is connect with people that do! For example, as a consultant, I have multiple relationships with various banks. When one of my clients needs a banker, I make the connection. People love feeling like they have it all, so give them the benefit and ask for help.
key elements when seeking financingLook at the bank for their philosophy and how they take care for their customers. In addition to philosophy, look at their morals.
Some questions to ask your banker in the “dating” stage include:
  • How long is a typical relationship with your customers?
  • What are the communication boundaries?
  • What is the bank’s view of breaking debt covenants?

Relationship or Transaction

Another important question you need to ask yourself is: “is this bank looking for a relationship or a transaction?” If you answer the latter, then you are just commission to them. When times are rough, you’re going to get cut. But if the answer is a relationship, then you’re looking at a long healthy marriage.

Relationships are absolutely critical in business. Value these relationships and take care of people. It will reflect in your business.

How does the bank deal in times of crisis?

A few years ago, I had a client that went through a period of stress. In the last quarter of their fiscal year, the business was growing and was doing well. They had 4 quarters of decline, but had tracked their KPIs. Although they had broken a few debt covenants, they were tracking their progress carefully with the bank. This client had a strong relationship with their bank. Without that relationship, the bank would have taken my client to the “workout” group.
Don’t have KPIs to help your banking relationship? Learn how to identify your KPIs and how to track them with our free KPI Discovery Cheatsheet. Click here to download your cheatsheet!
When you stub your toe, how does your bank react? Are they willing to let you slide on debt covenants for a few quarters as long as you have a plan to get out of the downturn? Often, people don’t see the importance of knowing how your bank is going to react in times of crisis. The economy continually ebbs and flows, changing for good or for bad.
Also, how does the bank deal with growth? You need more financing, but you are breaking covenants. Are they willing to provide financing with the knowledge that things won’t pick up immediately?

 The Workout Group

Several years ago, the bank wanted to meet with another of my clients because they had broken their debt covenants. The client calls me after meeting with “great news”! He said that the Bank had offered to work out his problems in the workout group. This “workout” group isn’t to work out your problems and put you back on track. It’s to work you out of the bank. This is not a good thing.
You don’t think your house will ever burn down, but what happens if your house does burn down? You don’t think you need a bank to weather the storm, but what happens when you need the bank to weather the storm with you? Assess whether or not your current banking relationship will be your insurance in the case of a fire or storm.
One way to do this is to look at the bank’s philosophy of business and their internal culture. How tight are they with the rules? Are they willing to stretch a little on their debt covenants and step up to help in times of distress? My client’s bank was unwilling to stretch its debt covenants. Instead the bank just wanted to wipe their hands clean of my client and move on to the next sale.
This willingness to be flexible all boils down to relationships. I have to warn you though, not every bank is similar in their goals.

key elements when seeking financingGet in Line

To prevent being put into the “workout” group, it’s crucial to start out on the same page. Get an alignment of interests, philosophies, culture, and anything else that would impact your company.

Interest and Philosophies

If the bank is only interested in their bottom line, then it may not be a good fit. If the bank is truly invested in your company and is willing to help you out in any reasonable way, then it’s a perfect match.

As I’ve built The Strategic CFO, it’s been a priority of mine to create relationships with bankers as they are going to reap the benefits of my clients doing business with them and I value their expertise. As a result of our mutual interests, the bankers in my network continually push potential clients towards my consulting practice. Those bankers and I have a strong relationship where we understand each others’ needs and desires as well as feed each other.
Of course though, I have had bankers tried to take advantage of my generosity and not return the favor. As a result, those relationships did not last long. It’s all about getting ones’ interests and philosophies in line.

KPIs That Influence Debt Covenants

Banks monitor your debt covenants. To help them (and you) out, identify KPIs that influence debt covenants to help track where you are and where you’re going. Picture this, your significant other or spouse comes home and lets you know that they’ve purchased a house, car, and boat without ever discussing it with you before. If you’re like me, I’d be surprised and would want to control the situation. If your significant other continues to make extravagant purchases or decisions without your prior knowledge, you would have trust issues and may want to cut up their credit card while they’re sleeping.
People see banking relationships as far-off and a different type of relationship. But the truth is, it’s all the same. Relationships are relationships. If you or your company or your significant other continues to create negative surprises, it’s not going to help with the relationship.
First, fix the problem before it becomes an issue. As soon as you see a yellow flag, jump on it!
Then after you fix it, let your bank know what has happened and how it has been resolved. This not only comforts the bank but builds trust. If the yellow flag starts turning red, alert the bank and outline the consequences. This helps you prepare and for the bank to prepare. Procrastinating this step can result in devastating consequences. The bank may be able to help you if you give them enough time.
Start identifying and tracking those KPIs that influence your debt covenants. For help and tips on how we measure KPIs, download our KPI Discovery Cheatsheet today! Know your numbers and where your company is the weakest so that you can start turning around your future.

key elements when seeking financing

Strategic CFO Lab Member Extra

Access your Flash Report Execution Plan in SCFO Lab. The step-by-step plan to create a dashboard to measure productivity, profitability, and liquidity of your company.

Click here to access your Execution Plan. Not a Lab Member?

Click here to learn more about SCFO Labs

Key Elements When Seeking Financing

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What You Should Know About Breaking Debt Covenants

What You Should Know About Breaking Debt CovenantsThe end of the first quarter of 2015 is approaching, and quarterly debt covenant compliance certificates are coming due. If your business is like many in our area, this thought probably fills you with dread. With so many businesses in Houston tied to the energy industry, the effects of the free fall in oil prices that started last summer will begin to be seen in this quarter’s results. Watch the video below to discover what you should know about breaking debt covenants.

What You Should Know About Breaking Debt Covenants

So what can you do if you’re out of compliance? Even though the situation may look bleak, there are several things a business can, and should, do when faced with broken debt covenants. Check out this video that addresses:

Learn how you can be the best wingman with our free How to be a Wingman guide!

What You Should Know About Breaking Debt Covenants

Strategic CFO Lab Member Extra

Access your Projections Execution Plan in SCFO Lab. The step-by-step plan to get ahead of your cash flow.

Click here to access your Execution Plan. Not a Lab Member?

Click here to learn more about SCFO Labs

What You Should Know About Breaking Debt Covenants

See also:

Daily Cash Report

Flash Report

Dynamic Cash Flow Projections

Bank Covenant Violations

How to Be More Credit Worthy

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Choose a CPA or Auditor

Choose a CPA or Auditor

Do you choose a CPA or auditor? Any company whose stock is sold to the public is subject to the reporting requirements of the Securities & Exchange Commission, which include having its financial statements audited by an independent certified public accountant. Whereas companies, whose stock is not sold to the public, are not subject to such reporting requirements. But many such companies have an annual audit of their financial statements performed because one of the following may require it:

Owners may require one to satisfy themselves that the data provided by the company’s financial staff is “materially correct.”

It should be understood that an audit does not guarantee that the financial statements are 100 percent “correct” but rather that they are “materially correct and not misleading.” Also, the audit is not intended to detect fraud.

Selecting an Auditor or CPA

Selecting an auditor (CPA) is an important task for a company, as the CPA can be a valuable resource for information, and such relationships generally last for years. But privately-owned companies rarely use the 4 largest international (Big 4) certified public accounting firms; particularly if the company revenues are under $100 million. This is because the fees commanded by these firms who perform most of the audits of the world’s publicly owned companies would be too expensive.

Factors to Consider When You Choose a CPA or Auditor

Consider the following factors when choosing from the remaining firms:

  • The nature of the company’s operations – multi-national, multi-state, or multi-location within a state
  • Company plans for expansion, potential future debt placements, and IPOs
  • Experience of the CPA in company’s industry, particularly that of the local office staff’s experience
  • Size of CPA and its impact on ability of CPA to meet company reporting requirements, such as timetables and contractual deadlines
  • Compatibility of CPA staff with company culture
  • CPA’s reputation within the local business community, particularly the company’s bankers, trade creditors, or other debt holders
  • References from existing and former clients
  • Potential for year-to-year stability of staff assigned to your account
  • Tax experience in company’s industry
  • Composition of CPA’s staff assigned to account
  • Distribution of CPA’s businessaudits, write-up, tax
  • Willingness of CPA to utilize company staff to minimize annual audit and tax return preparation fees
  • Audit fee charged

Keep in mind that Bigger does not necessarily mean BETTER SERVICE for your company.

Determine which CPA or auditor are the right fit for your company using our 5 Guiding Principles For Recruiting a Star-Quality Team.

choose a cpa or auditor

Strategic CFO Lab Member Extra

Access your Recruiting Manual Execution Plan in SCFO Lab. The step-by-step plan recruit the best talent as well as avoid hiring duds.

Click here to access your Execution Plan. Not a Lab Member?

Click here to learn more about SCFO Labs

choose a cpa or auditor

See Also:

How to Control Audit Fees
How to Hire a CFO Controller
American Institute of Certified Public Accountants – AICPA
How to Control Annual Audit Fees
Certified Public Accountant (CPA)

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