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Lessons Learned from My Workout Banker

Lessons Learned from My Workout Banker

Lessons Learned from My Workout Banker

By Jim Gilbride

Our business had been flying high, until our largest supplier decided to self-distribute their products and took 85% of our business with them. I advised my banker and we worked quickly to reduce and renew our line of credit. Shortly after that, my banker was excused, resigned, or fired from the bank. Upon introduction to our new banker, we outlined our situation and plans for rebuilding, at that time we also advised the bank, we would need their help as we foresaw a cash shortfall until we could regain our volume and profitability. Our new banker advised, they would discuss with their boss and respond quickly. It was at this point I became a “special asset” …it is always nice to be thought of as special!!!

Turns out my definition of special and the banks did not align. Bottom line they wanted us to exit the bank promptly. Our workout banker, Mr. H, turned out to be a stronger ally then we expected. We presented our plan to Mr. H. and proceeded to get to the work of regrowing our businesses. The first year went pretty well, we doubled our volume, and lost less money than expected, but we were burning cash and couldn’t tell if the light at the end of the tunnel was daylight or a freight train.

Year two of the rebuild saw growth slowing and cash continuing to run out. We reduced expenses, consolidated certain products into fewer warehouses, and increased prices to maintain some sense of equilibrium and reduce our cash burn. Results of year 2 showed a 30% grow rate, but still short of the finish line, and cash was nearly gone. We took our weekly cash flow forecast down to a daily exercise and set out for year three.

Year three started with slower growth than expected and continued tightening of cash. We had been talking with another similar distributor about combining efforts in one market and finally had what we thought was a workable plan, except we were short $600k in forecasted cash to see us through to profitability. We approach MR. H, at the bank and made our case to him requesting an increase of our line of credit from $3M to 3.75 to cover the needed working capital. To our surprise we received the increased requested to proceed with our plan. We refinanced all of our debt 12 months later and left Mr. H and his bank. 

18 months later I had the pleasure of sharing coffee with Mr. H to reconnect and learned he had left his bank. In our discussion he mentioned to me “you don’t know how rare it was to get the bank to loan you more money”. Being the curious type, I asked him why he/they did in fact loan us the extra funds. Here comes the lesson…. he said, “Jim, first off, the bank doesn’t want your business, they want you to pay them back as originally planned. Secondly, you and your team were the most knowledgeable about your business and likely the best people to turn things around. You had a plan, you knew your numbers, communicated regularly, and most importantly never surprised me. You didn’t always hit your numbers, but you had good sound understanding of why and how to fix it.” 

From that moment forward, I have a new respect and understanding of how to build a strong relationship with a banker. Bank funding is the least expensive form of commercial funding available. Your banker is your mouth piece and advocate at the bank. Bring them into your business, show them the plan, demonstrate to them you know your numbers, communicate regularly and most importantly, do not ever surprise them. 

Fast forward to today, I have the great honor of working with many business owners, providing them with fractional CFO services to help them build their business. We emphasize the need to know your numbers, and communicate them regularly with your banker. Both of those activities will provide a foundation for greater success. 

Jim Gilbride is an Area President with FocusCFO based in Cleveland. 

Founded in 2001, FocusCFO is the leading onsite fractional CFO services provider in the Midwest and Southeast, with more than 100 CFOs and Area Presidents throughout Ohio, Michigan, Kentucky, Indiana, Pennsylvania, Tennessee, and North Carolina. FocusCFO works closely with small to medium sized businesses helping business owners gain control over three key financial and operational areas: increasing cash flow, reducing business risk, and creating a platform for scalable growth. This allows business owners to then realize full financial control and increased value in their businesses. 

For more information, visit us at focuscfo.com or follow us on LinkedIn. 

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Operating Efficiencies of a Contractor

Operating Efficiencies of a Contractor

Operating Efficiencies of a Contractor

The construction industry is facing major challenges due to the current recession. Companies are going out of business because of operating inefficiencies as well as overly aggressive bidding on significantly fewer available projects. Many of those contractors operated inefficiently in the past and still managed to maintain profitability because of the building boom, but in the current economic environment they are no longer profitable and facing liquidation. 

In order to survive in this competitive market, contractors must focus on the following operating indicators: 

Daily Job Costs

It is imperative to know the costs charged to each job on a daily basis. A contractor cannot wait until the end of the week, or even worse, the end of the month to determine what costs are being added to each job. This includes labor and material costs, and both must be properly tracked, measured, and recorded based on appropriate standards. 

Cost to Date Compared to Estimated Cost

Contractors prepare estimates for each job to determine their bid price or contract amount, and the estimates for labor and material are computed separately. Subcontract and equipment will also be estimated if they are necessary for the job. 

It is critical that the contractor constantly compare the cost to date to the estimated cost on each job. If there is a variance between actual cost and estimated cost, research needs to be done to determine what issues are causing the variance so that those issues can be managed appropriately. 

Reasons for costs exceeding budget can vary. Some of the most common reasons are labor inefficiency, material overruns, incorrect estimates, and changes in the scope of the job. All of those reasons are caused by underlying factors that must be managed. 

It is imperative to constantly monitor actual costs to estimated costs. A missed change order can be the difference between making a profit and losing money on a job. 

Gross Profit

As in every industry, gross profit is an important measure in the construction industry. A contractor must maintain a certain gross profit on every job to cover the cost of overhead and to create a net profit. 

The gross profit percentage starts with the estimating and bidding process, and it must be constantly monitored for each job in process. It is also necessary to determine the gross profit that will be earned on the backlog of work. 

Over / Under Billing

Contractors define over billings as billings that exceed estimated revenue and under billings as billings that are less than estimated revenues. Many contractors give over / under billing little consideration because they view over/under billing as a computation by accountants to properly match revenue and costs for financial statement purposes. However, over/under billing should be used as a tool to determine if the contractor is billing properly. Constant under billing on a job or jobs can be a signal that there is an underlying problem on the job that the project manager does not want disclosed. Obviously, it is generally desired to over bill on all jobs to create positive cash flow. The concern with overbilling, however, is that contractors sometimes forget that the excess cash generated will be needed for future costs on the job, and then they spend the money on unrelated items. 

In order to be competitive, contractors must monitor the above key performance indicators. With the help of an in-house or outsourced CFO there is no reason that any contractor should not be able to maintain these metrics in order to operate at maximum efficiency and profitability. 

Founded in 2001, FocusCFO is the leading onsite fractional CFO services provider in the Midwest and Southeast, with more than 100 CFOs and Area Presidents throughout Ohio, Michigan, Kentucky, Indiana, Pennsylvania, Tennessee, and North Carolina. FocusCFO works closely with small to medium sized businesses helping business owners gain control over three key financial and operational areas: increasing cash flow, reducing business risk, and creating a platform for scalable growth. This allows business owners to then realize full financial control and increased value in their businesses. 

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Keys to a Solid Relationship with Your Business Banker

Keys to a Solid Relationship with Your Business Banker

Keys to a Solid Relationship with your Business Banker

Cultivating a strong relationship with your banker can help you and your business achieve amazing success. Listed below are some key areas to enhance your relationship with your bank. 

View and Treat your Banker as a Partner in Helping You Reach your Goals

Help them get to know you and your company, business cycles, etc. Invite them to tour your facilities and meet your team. When your bank understands your business model and knows the key management team members (i.e., CEO, COO, & CFO), they tend to have more confidence in you and your team, which strengthens your relationship.

Do not view your bank as an adversary or as a party standing in the way of your business plans. Developing a relationship of trust and honest communication will go a long way with your bank. Try to utilize key bank services such as a lockbox and depository accounts. The larger your relationship with your bank, the more attention you are likely to get from your relationship manager.

Communicate with your Banker on a Regular Basis

 It is important to provide your relationship manager with financial statements on a quarterly basis at minimum. Meeting with your banker and bringing your CFO with you to review your results will enhance the bank’s confidence in your ability to manage your business. 

Maintaining and sharing a rolling 12-month P&L, Balance Sheet and Cash Flow forecast with your banker is also important. This activity not only keeps you aware of your current risks, growth, and capital needs, but it also allows you to be proactive with your bank when requesting additional financing. The forecast should include key drivers and other assumptions as analyzed and compiled by your CFO. 

Monitor and stay compliant with your loan agreement. Violations of bank covenants are a serious problem, particularly if you just started a new relationship. One of the worst situations that can happen to your company is to have your bank call your debt, leaving you scrambling to find new financing, which is likely to be difficult. Your CFO should manage your compliance procedures. 

Get to Know Others in the Bank that Will be Involved in the Credit Decision (Underwriter)

Bankers do not think and operate like equity investors. They have a much lower tolerance for risk. When you understand the banking environment, you can understand their requirements for secondary sources of repayment, collateral, and/or personal guarantees. 

Getting to know the underwriters in the bank will enhance your understanding of how the bank makes its credit decisions. This will allow you and your CFO to evaluate your financial position and how much credit your business is likely to get. This will also help you to address questions or concerns that your bank may have during the credit decision process. 

Keep Internally Generated Working Capital in the Business

Banks want to help their clients to successfully grow their businesses. Most banks will have tangible net worth requirements that require you to keep a specific level of capital in the business. Do not draw below this level, and ideally keep an amount of cushion above the requirement. Your CFO will use your financial statement forecasts to predict your capital levels. 

Founded in 2001, FocusCFO is the leading onsite fractional CFO services provider in the Midwest and Southeast, with more than 100 CFOs and Area Presidents throughout Ohio, Michigan, Kentucky, Indiana, Pennsylvania, Tennessee, and North Carolina. FocusCFO works closely with small to medium sized businesses helping business owners gain control over three key financial and operational areas: increasing cash flow, reducing business risk, and creating a platform for scalable growth. This allows business owners to then realize full financial control and increased value in their businesses. 

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How to Get Your Business Credit Line Increased

How to Get Your Business Credit Line Increased

How to Get Your Business Credit Line Increased

Renewing or increasing a bank Line of Credit (LOC) can pose a significant challenge for businesses today. Being a good customer, meaning that you have a history of making your payments on time, is not necessarily enough to warrant extended credit. In today’s banking environment, many other factors have become part of the credit underwriting process. 

It is common practice today for banks to analyze overall credit worthiness, collateral, and cash flow when making credit decisions; therefore, it is critical for business owners to understand their Balance Sheet, Income Statement, and Cash Flow Statement, particularly cash flow from operations. 

We will discuss the following key factors that business owners should consider when seeking an increased bank Line of Credit: 

1. How much is needed, why is it needed, and how much of it will be used 

2. What are the financial covenants and can your business meet them 

3. Your business collateral 

4. Communication with your bank 

How Much is Needed, Why, and How Much Will be Used

To calculate your funding requirements, you need a twelve-month cash flow forecast that incorporates accurateprojections for key cash flow inflow and outflow sources. The specific amount of funding required can only be determined by also including the fluctuations in all Balance Sheet accounts. Knowing how much you need and documenting your method to determine that amount will demonstrate your business credibility to the bank, and therefore increase your likelihood of approval.

The true purpose of a Line of Credit is to fill the funding gaps that occur due to the cyclical nature of a business caused by increases in accounts receivable and increased inventories that are due to increased sales, or by (preferably not) slow paying customers or obsolete inventory. Lines of Credit should never be used for the purchase of long-term assets or to fund losses. These amounts generally can’t be repaid within one year, which is the typical preference of banks. If your outstanding balance does not significantly fluctuate, it will be an indicator to your bank that your Line of Credit is not being used for cyclical funding gaps.

It is important not to request more financing than you really need. Accurate and expert cash flow analysis is the only way to determine this amount. If you ask for more financing than you need, the bank will question your competence; their confidence in you as a business owner is an important factor in their decision-making process.

What are the Financial Covenants

Virtually every Line of Credit comes with financial covenants, which are conditions of your funding and benchmarks that you must achieve. It is essential to understand these covenants and to comply with them. The most common covenants are working capital, liquidity, and debt coverage, but they can include anything else the bank considers relevant to risk, such as owner compensation, capital spending, retained earnings, owner distributions, tangible net worth, and more. 

Collateral

While cash flow is the main focus of banks, collateral is also of primary concern, and banks never lend 100% of the value of any collateral. Typical collateral for Lines of Credit includes qualified trade receivables and inventory. It is important to understand how banks define qualified collateral, and how to calculate its value. 

Communication

The business owner’s communication with the Banker is probably the most important and yet understated factor that the business owner must focus on – not just when trying to increase a Line of Credit – but all of the time. You need to have an ongoing relationship with your banker, and not just talk to them when you need to borrow money. Another important factor related to communication is providing the banker with documents that are required based on your financing agreements on a timely basis. Sometimes, not providing the information can cause a default of the loan, and it is your responsibility to provide that information and to make the banker’s job as easy as possible. This is a critical function of your CFO. 

If you, as a business owner, want to increase your Line of Credit, you need to understand the requirements and why they are in place. Banks want to lend money, but only for the right purposes and only when they are confident that it will be paid back. Having the right documentation in place to prove that you manage your business and your cash flow effectively will show your bank that you are a good candidate for additional credit. 

Founded in 2001, FocusCFO is the leading onsite fractional CFO services provider in the Midwest and Southeast, with more than 100 CFOs and Area Presidents throughout Ohio, Michigan, Kentucky, Indiana, Pennsylvania, Tennessee, and North Carolina. FocusCFO works closely with small to medium sized businesses helping business owners gain control over three key financial and operational areas: increasing cash flow, reducing business risk, and creating a platform for scalable growth. This allows business owners to then realize full financial control and increased value in their businesses. 

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Five Steps to Improve Your Business Cash Flow

Five Steps to Improve Your Business Cash Flow

Five Steps to Improve Your Business Cash Flow

We have all heard the saying “cash is king”. As a business owner, your biggest concern is always the cash balance of the company – you need to know that you will have enough cash on hand to meet your obligations. 

In any business there are three sources of cash: the business owner/investors, your bank, and the daily operations of the company. The cash generated from the company’s operations is the area where the management team can have the most impact at the lowest cost. Managing all sources of cash is a critical function for your business; protecting the liquidity of the business is the key to the success and future growth of your company. 

1. Rolling Cash Flow Projections

The first step is to develop rolling cash flow projections. These projections will inform the management team of the current cash balance and future cash requirements, which will allow the team to anticipate problems and develop solutions in advance of a cash crisis. 

Sales forecasts for these projections must be based on the appropriate current and historical factors, and forecasts of cash inflow sources and cash needs must both be accurately analyzed as well. The projections must also be updated and refined continuously so that they gain accuracy. 

2. Accounts Receivables

Accounts receivables should be analyzed to identify information that can be used to manage cash flow and to improve profitability. Several key metrics should be identified during this process; those metrics can be used to 

drive management decisions that will have a significant impact on the cash flow and the bottom line of the company. 

3. Inventory

Proper inventory management will be a key driver of business cash flow, and the process involves more than just measuring inventory turns. Several other key metrics should be analyzed that will provide critical information to include in the cash flow projections. The information will also help to drive the sales management process. 

4. Accounts Payable

Accounts payable management can have a bigger than expected impact on cash flow. If accounts are properly categorized and prioritized based on their impact on operations and other factors, the company will have a greater ability to preserve cash. Analysis of accounts payable also provides valuable information to include in the cash flow projections as well as for the inventory management process. 

5. Non-Core Assets

Accurate cash flow projections will enable the management team to identify core business operational functions as well as what actually drives the profitability of the company. Once this is determined, the team can begin to identify non-core assets that can be converted to cash, as well as functions that can be modified to positively impact cash flow. 

Taking these steps to improve cash flow from operations must be done quickly and with accurate information so that you, as the business owner, understand your company’s profitability by customer and product lines and can act quickly to protect the liquidity of the company and plan the future direction of the business. With positive cash flow and cash on hand, you can spend less time worrying about cash emergencies that may arise, and more time on strategic matters that affect business operations and your customers. 

It is critical that the forecasting process is accurate and timely, and if the current staff is unable to perform this task effectively, then you may need to seek outside support. Cash flow analysis and projections require highly specialized skills. A professional CFO will manage these functions to maximize the cash flow of the business so that your company first becomes healthy, and then can grow to the next level and beyond. 

Founded in 2001, FocusCFO is the leading onsite fractional CFO services provider in the Midwest and Southeast, with more than 100 CFOs and Area Presidents throughout Ohio, Michigan, Kentucky, Indiana, Pennsylvania, Tennessee, and North Carolina. FocusCFO works closely with small to medium sized businesses helping business owners gain control over three key financial and operational areas: increasing cash flow, reducing business risk, and creating a platform for scalable growth. This allows business owners to then realize full financial control and increased value in their businesses. 

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