What would you do if you lost a customer that represented more than
60 percent of your business? How about if a key employee jumped ship and
joined the competition? When customers
pay late, equipment is tied up in repair and
vendors come knocking, business owners
can run out of the “liquid” that fuels business operations: cash.
“Hopefully, a banker is talking regularly
with customers and asking relevant questions along the way so there is an indication that a business may be heading toward
a performance downturn before it happens,” says John Covington, vice president
of business banking at Fifth Third Bank in
Cincinnati. “I can’t stress enough the
importance of ongoing dialogue with your
banker.”
Smart Business asked Covington how
business owners can plan for tough times
and work through them with successful
results and, in effect, a stronger relationship with their bankers.
What obvious signs indicate to a banker that
a business is in trouble? What can cause a
‘tough time’?
Usually, bankers suspect when businesses are experiencing a challenging operating
cycle. The trick is to pay attention and be
prepared before events impair their ability
to pay any principal and/or interest due.
Businesses may appear on an overdraft
report and rely on overdrafts to cover
checks written to suppliers or employees,
or banks may notice lack of timely correspondence. Owners may delay sending in
financial statements or ignore phone calls
from the bank. Finally, the financial statement may reveal that an operating
covenant has been violated.
The events that can cause owners to pay
late or not at all range from a slow economy, lengthening inventory turns, increased
competition, changing technology, different payment terms from customers or vendors to losing a key employee or customer.
Bankers who do their jobs are asking
about these issues before they become
concerns for business owners. Similarly,
owners must be honest about changing business conditions and how this will
affect their ability to perform and, ultimately, pay the bank.
When an owner approaches the bank during
a tough time, how will a banker work to
develop a solution?
It’s always better to plan for a potential problem so you can work through
tough times rather than waiting to
react to them. But business owners
who are tied up in daily operations
often let financials slide too far before
realizing they must turn around their
situation before a ‘tough time’ sabotages the business’s potential for success. That said, bankers will review
company financial statements and
compare performance to past years,
quarters and months.
Furthermore, how did the company perform relative to the established financial
covenants? Just because a company may
trip up, a covenant does not necessarily
mean a bank will ask for its money back.
Set appropriately, financial covenants
serve as an early warning system that,
when breached, forces dialogue between
the banker and the borrower. Bankers dig for reasons and ask, ‘Why? Why is inventory turning slower? What is putting a crimp
in cash flow? Is it different vendor payment
terms, slow-paying customers or unexpected operational expenses? Why did a key
employee leave? Did the business offer
him or her a profit-sharing plan or incentives to stay? What is the company’s customer concentration profile — should the
business work to diversify?’
After reviewing the ins and outs of the
business, bankers will address areas where
owners can cut back. For example, if the
income statement shows a business is not
earning enough money to pay for its operations, then an owner must either generate
additional profitable revenue or remove a
layer of expenses. The banker then works
as an adviser, helping the owner to work
through scenarios to improve the financial
outlook of the company.
What preventive measures can owners take
so they aren’t putting out fires?
Develop contingency plans to address
risk factors in the business, and update
those plans on a regular basis. For example, one of my clients lost a customer that
represented 80 percent of his business.
This was a big loss, but the owner knew
how to react. He had a plan. First, he recognized that relying on a customer for such
a large portion of overall revenues was
risky. But the company’s overhead structure was such that the owner could control
expenses and make adjustments if necessary. He planned to pay down the building
loan so he wouldn’t have this fixed, monthly payment. He had a ‘skeleton staff’ he
could rely on if he had to cut labor. So
when he lost this customer, he acted on his
plan. Today, his business is smaller, but it’s
still profitable. Because he could react
quickly, his business didn’t miss a beat, and
his financials did not suffer.
JOHN COVINGTON is vice president of business banking for
Fifth Third Bank. Reach him at [email protected] or (513)
530-0791.