Like most other relationships, the relationship between a business and a banker is an ongoing affair a process.
“A small business should use a banker like any other part of the team,” says Mike Kramer, a business banking manager for FirstMerit Bank in Columbus. “They should work with their banker the same way they would work with their CPA or attorney.”
Smart Business spoke with Kramer about the process of working with a banker.
What’s the most efficient way to work with a banker?
If customers engage their banker in four areas, they will have a successful relationship.
- Have a plan and discuss it with your banker.
- Anticipate your needs in general.
- Use your banker for financial representation.
- Use your banker as a trusted adviser.
What advice do you have on planning?
Every customer needs to have a plan and to discuss it with his or her banker. I know it sounds simple, but often businesses don’t do that. They are reactive rather than proactive. A plan does not have to be elaborate or amazing but needs some foresight.
A good plan has to be transparent. A business can’t half-tell its story. A banker cannot work with a business if management is not being open. A good plan can not be created in a vacuum. Use your banker as a sounding board. Share ideas and work with your banker.
What sorts of benchmarks are important?
To anticipate its future needs, a business should establish benchmarks. Every business should have a three-month (short-term), a nine-month (mid-term) and a two-year (long-term) outlook. Anything past two years is dicey, unless you are anticipating a major project.
Be honest with yourself and your banker. Know the plan’s pitfalls. Sometimes you need to see the glass as half full, and sometimes you need to know it is half empty.
Lastly, have a rainy-day fund or a plan that will let you raise money against a rainy day. Too many business owners live without a reserve.
What exactly do you mean when you say ‘financial representation’?
A good business is represented by three legs: the owner, the banker and the CPA. The idea is to get all three legs working together.
Financials need to be prepared well. But be sure the statements are representative of the business reality and not tinted by tax concerns or other considerations. Good CPAs are worth their weight in gold.
Most owners are tied up in their business or their craft, but you need to know if you are meeting month-to-month goals. Sometimes business owners are surprised with what they are making month to month. A CPA or banker can help quantify revenue and earnings. It sounds trite, but if you don’t know where you are going, you will not know when you get there.
What kind of advice, beyond things like loans or checking accounts, can a banker offer?
As an adviser, a banker is a great resource for exploring alternative investment avenues, learning ways to manage cash or talking about retirement plans.
Whether it is with FirstMerit or any other bank, your banker should be your confidant. He or she should know more about your business than anyone else in the world except you.
Bankers have the experience and the access to measurements that can determine whether your business condition is typical or normal. It’s like going to the doctor when your arm hurts: If you do not know if a sore arm is normal, how are you going to be able to take care of it properly? Financial metrics are similar, so you need expert advice.
Finally, bankers often have links to other resources, like the SBA (Small Business Administration) that can provide additional assistance. Banks like ours should be service-driven organizations, so use their resources.
How can businesses fund cash shortfalls?
Shortfalls can be filled from three sources, depending on the amount of the shortfall and expected duration.
First, the bank can help fill the gap, provided there is sufficient collateral from either the working capital assets or possibly excess value in fixed assets. Second, there are mezzanine providers that can provide bridge financing on a short-term basis to get the company through the cash crunch. Finally, the owner may be required to provide personal liquidity to meet the needs of the business.
Where can businesses turn for help?
If you need help calculating your cash flow, you should meet with your accounting or banking advisers, any of whom should be willing to provide assistance. A rolling six-month cash projection that effectively encompasses a company’s cash cycle is an exceptional tool for this type of planning.
Once a company has the information from its cash flow projections, it should meet with its banker and develop a plan to fund a projected liquidity shortfall if one exists. Banks are best able to help in these situations when all of the potential factors are identified and brought forward, giving all parties full knowledge of a situation. Surprises are a worst enemy for both client and bank. A company’s foresight in this regard exhibits management maturity and planning abilities. The time to do this is now.
Mike Kramer is a business banking manager for FirstMerit Bank. Reach him at (614) 718-5558 or firstname.lastname@example.org.