How To Impress Your Banker

Oct 28, 2010

A picture may tell a thousand words but your financial statements may reveal a lot more than you intend - at least to a banker. However, they ,may not be telling the story you want your banker to hear.


The most important thing to know about bankers is that they crunch your numbers through a ratio machine.  Financial ratios have almost magical qualities in that they can relate different parts pof your business, highlight trends and pin point serious deficiencies in how you manage your company.


Knowing how your numbers create ratios and why they may appear to be unfavorable is crucial to getting your true message across.


In a recent American Express business article, Kate Lister outlined a checklist to make sure you can explain what is happening.   Here are some of the common business situations that can distort your financial statements and potentially lead your banker astray.


Balance Sheet Problems


Your Balance Sheet offers a snapshot of what you own (assets) and what you owe (liabilities) on a certain date. Tomorrow or yesterday things could look very different.  That means that unusual year-end transactions can paint the wrong picture, and because year-to-year trends are almost as important as the numbers themselves, it's one you'll be stuck with for a long time. Here are some of the more common problems:


1. Large year-end purchases – inflate AP and Invnetory


2. Large year-end sales – inflate AR and aging


3. Extended payment terms from your supplier at year end boost AP


4. Off-balance sheet assets – may overstate your Dent to Worth ratio


5. Friendly debt – may also hurt Dent to worth unless subordinated.


6. Highly depreciated assets that still have value won’t help



Income Statement Woes


Your income statement can tell the wrong story too.

7. A big contract or unusually large sale may be perceived as highly risky. It may also skew your year on year trends if this is a one-off.


8. One-time expenses can distort your numbers


9. A change in accounting methods can mess up numbers quickly


10. Owner perks may understate true profitability – make sure the bank knows what is discretionary


11. A change in your sales mix may distort margins


12. A bad year always needs an explanation of what has been doen to fix things.



Lister’s article then asks “What Your Banker Wants To See”


So what the heck does your lender want to see in terms of financial ratios? According to Brett Mansfield, Senior Vice President of Business Banking for Union Bank, ratio expectations differ by industry, the size of the business, and other factors, but in general, here are the benchmarks he and other lenders look for:


·         Current Ratio: 1.5 to 1 or higher 

·         Quick Ratio: 1 to 1 or higher

·         Debt to Worth: 3 or 4 to 1 or lower

·         Cash Coverage: 1.5 to 1 or higher

·         Performance Ratios (Gross Profit Margin, Operating Expense Margin, Net Profit Margin) should be consistent with your history and others in your industry

·         Accounts/Receivable (A/R) Turnover Ratios should be consistent A/R terms

·         Inventory Turnover ratios should be consistent with your history and others in your industry

·         A/P Turnover should be consistent with your payment terms

Mansfield notes too that ratio expectations aren't hard and fast. "Weakness in one area may be offset by other strengths."


It's your job as a business owner to make sure your numbers tell the right story and if they don't, the solution in most cases is fairly easy. You just need to explain anything unusual in the notes section of your year-end statements to clear up any potential flaws in the plot.



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