Getting the most out of your banking relationship

Over the last 6 months, the reduction in business and consumer confidence, tighter credit and lower asset values, have led to substantial changes in the way banks are approaching their relationships with their customers (our clients). As a result, we have recently provided a number of clients with advice as to how best to manage their banking relationships.

To assist you, we have set out below, a summary of a 4 step process to assist you in managing your banking relationship.

Step 1 - Know what you want from your bank

A key principle in working with your bank is to always aim to deal from a position of strength and to take the initiative and anticipate what they will want from you. It is far better for you to proactively manage your banking relationship, rather than “waiting for the dreaded telephone call”.

In order to be able to take this approach, you should understand the role that is played by your bank both now and into the future. Is their role to provide:

• Ongoing support?
• Support for restructuring or growth opportunities?
• An ability to expand offshore or engage in international trade?
• Research and development funding
• Fixed asset funding?

Step 2 - Know your facilities, including all covenants

It is critical that you have a detailed understanding of your existing facilities. This goes beyond knowing your overdraft limits and long term debt limits, to also include other issues such as the security you have provided (including personal guarantees and cross guarantees) and covenants.

When reviewing your financial covenants these can include a number of ratios such as interest cover, or comparison of actual results to budget or prior year. Our recommendation is that, where practical, you calculate your adherence to these as part of your internal monthly management accounts. This will ensure that there are “no surprises” in the event that there is a problem when the bank ultimately conducts your annual review.

The adherence to covenants has taken on an increasing level of importance. We have noted a number of instances, where covenants have been breached in prior years to little or no consequence. More recently through, what may seem to be a small issue (such as inadvertent late provision of financial statements) is now often triggering a more detailed investigation by bankers, and potentially a facility review.

Step 3 - What does your bank want to see from you?

Once you have clarity around your funding facilities, the next issue to consider is what the bank want from you. Firstly, you need to be able to clearly articulate your strategy and your business’s "Sustainable Competitive Advantage" – i.e. what makes you consistently different from and better than your competitors. Once that is clear, they will want to see:

• Strong management control of key business drivers
• Stable cash flows – increasingly hard to achieve
• Regular reporting that meets covenants
• Regular dialogue (but on your terms)
• Consistent and timely financial information
• "Bankable" forecasts of profit and loss, cash flow and balance sheet

Some of these specific points are worthy of expansion:

• Consistency of financial information
• If you are presenting your management accounts, they should, follow the same accounting policies as your formal annual financial statements.
• The format should be clear. Ensure that you emphasise your EBITDA and EBIT.
• If necessary, it may also be appropriate to enclose a covering letter to further assist in the interpretation of key issues, identify related party transactions and provide key comparisons.
• Ensure all assets are included at the correct values well in advance of any discussion – say 6 – 12 months.
• Your forecasts
• Your forecasts need to be more than a profit and loss statement. The expectation of banks is that you will provide forecasts which have clear assumptions, and a fully integrated P & L, balance sheet and cash flow. This process is not overly difficult, but often requires some guidance from us regarding its completion.
• Virtually all of our clients have re-forecasted their business’s likely financial position through to June 2010 at the earliest. You should ensure that your new forecasts are “bankable” and convey measures that you may need to take if conditions do not improve, as well as highlight opportunities available to you.

Step 4 – Communication with the bank

Finally, there are a number of ways to communicate with your bank manager. Which is best for you will depend on the situation and comes back to your objectives. The main point at all times is that you seek to take the initiative.

What should you expect from your bank?

As noted at the outset, we have seen a marked shift in the relationship of our clients with their bankers. In our view, the above approach is the best way to manage the ongoing relationship. Even with this approach, you should expect that the bank will as part of a facility review seek to:

• tighten terms, and focus on their margin
• place greater emphasis on meeting covenants
• seek new valuation of assets, which could well be lower
• seek more regular contact with you

Conclusion

In summary, the reduction in available credit and the economic downturn has led to a shift in the nature of clients’ banking relationships. As a result, we would recommend that you ensure that you take the initiative and clearly articulate your business strategy and your funding requirements in order to meet that strategy.

Author: Andrew Steer, March 2009

Want advice or more information on this topic?
Click here to contact Andrew Steer or Dale O’Connor

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