Getting cash is only a part of the challenge in funding a company’s growth.
Perhaps the bigger challenge is using that cash wisely. Banks usually are delighted to offer a business loan to help fund a
company’s growth. However, they expect
the funds to be used wisely and invested
“Cash flow is the most critical piece of
the equation,” says Lori Geier, vice president and market manager of Fifth Third
Bank’s business banking division.
Smart Business asked Geier what kinds
of benchmarks she has for “wise” use of
As a banker, what do you look for when a
company wants money to grow?
Whether the growth plan is for an acquisition, to start a new product line or to
expand into a new market, there are three
things we consider. First, we ask whether
the business has a plan with a vision and a
strategy that are measurable and quantifiable.
Next, does the company have reasonable
projections that show its plan will generate
cash flow? Does it have the staff, machinery and the expertise to support its plan? In
other words, does it have a handle on its
Third, is the plan reasonable and attainable? Does management have prior experience in rapid growth situations? What is the
company’s strategy to execute and evaluate
its success as it moves through time?
Of these factors, which is the most critical
Cash flow is the most critical piece. The
company has to understand its cash conversion cycle so it can calculate the true
cost of growth.
A company has to have a plan to maximize its inventory turns so it limits the time
it carries its inventory. Also, it should have
a good handle on the number of days it
takes to convert accounts receivable and
how long it takes to convert assets to cash.
Optimally, we want cash flow that will
allow a business to be able to cover obligations 1.25 times. Or, if we are looking at global cash flow, we want a ratio of about 1.6.
Are there other ratios a company must meet?
That varies by industry segment.
Businesses need to be in touch with what
they earn for every dollar they spend. A
new $10 million contract is not good for
growth if it costs $12 million to implement.
The ratios will be different depending on
the company and its industry, but we commonly look at ratios such as funded debt to
EBITDA, debt to tangible net worth, where
the lower the multiple the better. Working
capital ratios tells us if the company’s
‘engine’ is working. Return on equity
should be important to shareholders as
well as return on assets to show how effective the company utilizes its assets to create value.
How do you determine if a proposal makes
Whether you use bank equity or owner’s
equity, you have to do a solid cash flow forecast. Be your own devil’s advocate.
Write down your cash inflows and out-flows for at least 12 months, month by
month. We actually would prefer to see a
plan that covers three to five years.
The cash flow should show a realistic
picture of salary and benefit requirements,
insurance costs, added capital expenses
and maintenance costs, real estate requirements and additional costs of sales. With
these numbers on paper, you have a good
idea of whether you need a working line
of credit or a loan for capital expenses —
Are there red flags?
A good business plan will turn up any red
flags. Go over the plan with your financial
advisers, including your banker. Be sure
you leverage assets appropriately. Don’t
borrow with short-term assets over a long
period of time. An interest-only loan for
five years that is secured by accounts
receivable is not prudent. Match short-term credit with short-term assets.
Look at any contracts you are signing to
achieve anticipated growth. You shouldn’t
take a 10-year loan to buy a piece of specialized equipment, which supports a
three-year sales contract. Or, be sure you
are nimble enough to downsize yourself if
you end up carrying a big piece of equipment on the books after the new contract
Any final words of advice?
The people component is huge and often
overlooked. Be sure you have the right talent on hand to implement your growth
plans. This includes not only your own
engineers and sales staff but also partners
like your accounting firm. Will they all be
able to go to the next step with you?
Leverage the expertise of your business
advisory team in the planning stages as
well as throughout the execution of your
LORI GEIER is a vice president and market manager in the business banking division of Fifth Third Bank in Cincinnati. Reach her at