Incisive Financial Understanding

Bank pereives you as a risk

With an evident economic downturn and the resultant uncertainty impacting demand, it is inevitable that many businesses are trading at the higher reaches of their banking facilities. But banks are nervous. Experience in the US has contributed to making them particularly sensitive to how business customers are managing their accounts. Consequently, there is a great deal of attention being paid to short term cash flow.

Scared - you should be

Most people running a business have no problem with short term cash flow. They typically keep a rolling 4-week spreadsheet of expected cash receipts and cash payments. But wait a minute - hpow frightening is that? Business owners and directors with personal guarantees and even their houses pledged to lenders (for perhaps tens of thousands) but they can see no more clearly than just 4 weeks into the future!

Beyond 4 weeks, one might find some pretty dubious looking formulae. This is precisely why, when banks look for short term cash flow projections from a client, they specify a 13-week timeframe. Most find it hugely distracting at what is already a difficult time, to produce a robust forecast at an appropriate level of detail that a decent bank (or worse still, Corporate Recovery person) can't punch large holes in.

13-week cash flow forecasts

So if your bank is seeking this information, possibly in conjunction with commissioning an IBR (Independent Bank Review) by their Corporate Recovery friends, that you have the pleasure of paying for, you have to appreciate the gravity of the situation.

You will resent both the cost and interference, particularly as the work is not for your benefit. And the implications of the exercise are serious; and if it goes against you, potentially terminal. So if you can see this prospect looming give some thought to the following:

• Don't delay in taking ownership of the situation, particularly the numbers and the books - even if you haven't done so before. Lenders despair of business customers who think it's OK to have no idea about finance. So, if you need to, bring someone in to show you the basics (you're not after book-keeper level detail). But (at a minimum) you need to be able to gauge whether key balances are what you would expect them to be and to start to ask the right questions. It could take less than a day. And it could help your relationship with the Bank.
• It's important that the underlying book-keeping is sound and up to date. It often isn't (in which case those running the business are literally 'flying blind'). As in any field, there are good and bad book-keepers. If you are unlucky, and you're not close enough to the numbers to be able to spot what's happening, you leave yourself terribly exposed (and it could be at a point when you have precious little time to put things right).
• The level of detail entrepreneurs provide in forecasts is typically far too limited. And not enough thought is given to what the Bank will consider to be a credible proposition. If you do the projections yourself, play devil's advocate and be prepared to re-work the cash flow projections at least once a week (perhaps more)
• Give real thought to the changes you will make that will see your cash position improve. The Bank will calculate the impact of what you suggest. Make sure you're one step ahead - it's often trickier than you think. When we coach entrepreneurs in these situations, this is a key aspect
• If you feel really vulnerable, get someone experienced on your side (at an early stage if possible) to advise; maybe even a suitably qualified virtual coach. (They don't necessarily need to be 'on-site' with you.) It could prove a critical investment. Your staff can get other jobs - you probably have a lot more at stake.

But if any of the above is pertinent to you, perhaps take some comfort from what can be achieved in two extreme situations - see the scaffolding and windows case histories.

If you have particularly pressing concerns about your situation, you can call us in confidence and without obligation.

We can, if required, prepare cash flow forecasts (often remotely) from information supplied. These can be remitted in pdf format or printed and mailed as preferred.