Bank On It

THE LAST TIME you saw your banker in public, did you: A. Quickly cross the street keeping your head down, hoping he or she wouldn’t see you? or, B. Whip out your PDA so you could make an appointment to go over your latest financial statements and updated cash flow?

If you answered “A,” you’re not alone. Many business owners feel uncomfortable around bankers. Borrowing money sometimes has an almost furtive air about it, something that’s best done as quickly and quietly as possible.

That’s a shame because there are many businesses out there that could benefit from proper financing.

Few growing businesses generate enough cash from their profits to support their growth.

Many business owners feel uncomfortable around bankers. Many suppliers reward for rapid payment. Not taking advantage of a 2 percent/net 30 percent discount results in an effective 36 percent interest rate. A 1 or 2 percent penalty for going past 30 days adds up to 18 percent in yearly interest. Yet few business owners will borrow to make discounts or avoid late charges.

What if we treated borrowing money as we would any other commodity? All we are really doing is offering to buy something at a reasonable price — the temporary use of money in exchange of paying the bank interest. What if we knew, in advance, what information and documentation the banker needed to make the loan, then proceeded to supply him with it (and more)? What if we made a study of which institutions might be more eager because of market share and strategic plans to lend money to us and we concentrated our efforts on them? And what if, when we had a great relationship going with the bank, we went out of our way to nurture it by encouraging good communication and a constant flow of information?

We’d stand out from our competition, for one thing. For every business owner who comes in with a plan and quality financial statements, there are many more who come in with a few figures scratched out on the back of an old envelope, with inaccurate financial statements. If you were a banker, which owner would you rather work with?

Here’s what you should supply at a minimum:

Once you’ve got the loan and a good relationship going, don’t take it for granted.  Your company’s balance sheet and income statements for the last three years, plus year-to-date statements — in numbers and percentages.

• Key performance ratios, compared to your performance to industry standards.
• An up-to-date cash-flow projection, with three different scenarios based on poor, good and better-than-expected sales.
• Your personal net-worth statement, not more than three months old.
• An analysis of what you are going to do with the money and how you plan to pay it back. In other words, a business plan.
• A good business plan answers seven questions:

1. 1. Who am I?
   2. Where am I?
   3. Where am I headed?
   4. How am I going to get there?
   5. How am I going to make it?
   6. How am I going to sell it?
   7. How am I going to pay for it?

For extra credit, throw in a breakeven analysis of your expansion plans and a growth analysis on your balance sheet.

Forget your banker for a minute. Don’t you want to know the answers to these questions?

Once you’ve got the loan and a good relationship going, don’t take it for granted. Keep your banker in the loop with up-to-date financials and projections before he asks. On the other hand, if you are feeling like your banker doesn’t appreciate your business, don’t be afraid to look around for something better.

Don’t go just for a cheaper rate. Look at the whole long-term relationship. Be over-prepared and attentive, and you’ll be ahead of the game.

• Lucky Numbers
• 8.4%

That’s how much less the top 25 percent spent in total operating expenses than all other participating companies in 2006 (25.6% compared to 34.0% for all companies), according to a FIT Jewelers Benchmark Study. (This was the top group in owner’s discretionary profit — owner’s salary + net profit before tax divided by sales.) Most of the savings came from lower selling expenses — lower wages, commissions, etc.

• Money Math
• How Much Can you save by Operating more Efficiently?

If 8.4 percent doesn’t seem like a lot, apply this difference to median sales of $3,048,219 for all the stores in our study and the result is over $256,000 in additional profit for each company that controlled expenses as efficiently as the top 25 percent.

How do you come up with your operating expense percentage to compare? Add all wages (beside bench jewelers), employee costs, occupancy costs (rent, repair and maintenance, utilities, etc.) and general and administrative expenses (travel and entertainment, insurance, depreciation, etc.). Leave out costs of goods sold and other unusual or one-time expenses not related to normal operations. Divide this total by your total sales. For a company with $1 million in sales, every 1 percent saved in operating costs equals $10,000.

This story is from the June 2007 edition of INSTORE.