Without a plan or a road map, you never know where you will end up. That is just as true for businesses as it is for long, cross-country drives.
“Financial plans are great banking tools,” says Kim Snyder, vice president of business banking, Fifth Third Bank.
The key, she says, is to get the banker and all other members of the financial team involved early and often. “The balance sheet of a company is the company’s history,” she adds. “A good business banker will know that history intimately.”
Smart Business spoke with Snyder about financial plans and how they can help shape the future of your business.
When should a business get its banker involved?
Get them involved as soon as possible the earlier, the better. Banks can bring in experts who can provide helpful insights. Bankers have a lot of resources, both inside and outside of the bank. You should be sitting down with your banker for years prior to an exceptional need. This allows the banker to monitor your company during times of slow growth and have a better feel for the situation when an opportunity arises for faster growth or a one-time contract that needs to have an exceptional line of credit funded. The bank should play a role in all stages of your growth.
What should a business expect from its banker in this case?
In addition to lending money, the bank is a great source of advice. But, the success of any plan will depend on the openness of the client and how financially sound his or her business is. Banks bring the money to the table. They really want to lend money, but they also want to be repaid. Your bank needs to be involved in the preplanning stage, so it can follow your business into the growth stages.
How much time does a bank put into understanding a firm’s plans?
Banks will put a lot of time into analyzing and understanding those plans. Your business banker is the one who fights for your company and speaks for your company. The banker has to understand what you’re doing and why. If the bank doesn’t believe in your plan, then nothing is going to happen. However, in a situation that could go either way, if your banker has a good understanding of your business, he or she can do a much better job as your advocate.
How often should a manager have this sit-down with a banker?
At the very least, the whole management team should sit down with its business banker once a year, but quarterly meetings are best. This gives everyone a chance to review the financial plan and to talk about how the company is growing, how cash is flowing and how stretched the credit line is. The plan should define the first year and the next two years. You have to know your numbers. If you are not hitting them, it is better to see that right away to figure why you are off. Then you can adjust longer term.
Those plans should be communicated to all employees at all levels, not just the management team. That way everyone can buy in to the growth plan and know the risks and rewards.
Other than the chief financial officer and president, who on the management team should be involved?
All members of the firm’s internal strategic planning team should be present. The company’s certified public accountant and attorney should be present, too. The attorney is important. Many times, the attorney will not have the same advice or perspective as the financial members of the team. They are legal, not numbers, people. They look at protecting the business.
It is good to know how the accountant views the financial plans, as well. If a business is asking for a $4 million loan but shows an operating loss, the accountant can explain that the loss was taken for tax purposes. But, the business team needs to know that it can’t have it both ways.
What are some key metrics on a well-designed plan?
One key metric is the leverage ratio of the company three times the debt to the equity in the company ratios. Another key area is the credit score of the individual guaranteeing the loan, especially where the business relies heavily on one person. Over 750 is a good score it shows how the person manages his or her own money.
While ratios are important, all banks look at the Five C’s: character of the borrower, cash flow, collateral, capacity of the owner to repay and inject his or her own funds, and condition of the market. Sometimes the conditions in an industry segment are not right, such as gas stations and dot-com companies right now. But that does not mean that another bank might not be willing to lend. Different banks can be at different places on the cycle.
KIM SNYDER is vice president of business banking at Fifth Third Bank in Cincinnati. Reach her at Kimberly.Snyder@53.com.