As a business owner, you may find yourself in a conversation with your banking relationship manager who will suggest you talk to a Consulting CFO or introduce you to one of our partners at CFO Selections. You likely already know that a relationship manager sees themself as an advisory partner to your business and, therefore, wants you to succeed. However, it might not always be clear what they are looking for in working with a consulting CFO or why they are sending you in our direction.
As a banking relationship shifts from simply having cash or investment accounts to more involved business aspects (such as applying for a credit line, commercial mortgage, construction loan, or any other capital investment package), they’ll want to look at a business's financials, forecasting, and cash reserves. Their motivation is probably clear to you – they want to know that your business is a good investment and a safe bet (or a worthwhile risk) as they look at lending or investing money into it. To determine this, they’ll ask questions like:
- Are financials timely and accurate?
- Do the financials show adequate profits and cash flow?
- How do the financials compare against industry standards?
- Is there adequate staff continuity and sophistication to produce financials and forecasting that reflect business performance and anticipate growth/challenges?
These risk criteria will manifest in the following areas:
P&L Statement and Balance Sheet
When looking over past performance through profit and loss (P&L) statements and historical balance sheets, a reviewer will look for both the overall financial health of the business as well as profit and growth trends. To do this, they need to trust that the financials are an accurate reflection of business performance. Additionally, they will need to identify any potential flags that may indicate the accounting is not being done correctly or if there are areas of weakness (such as not collecting on accounts receivable effectively) that could jeopardize the business’s future.
An immediate flag for a bank can be if a business cannot turn financials around in a timely fashion. For example, if it takes 3 months to close the books instead of 3 weeks, does this mean the systems or staffing are simply behind? Or are there other deeper problems bogging down the business?
In reviewing financials, red flags may also be raised if statements do not match or are not consistent in their basis of accounting (i.e. one is cash-based and another is accrual). They will dig deeper to determine if this is simply a matter of sloppiness or if something fishy is going on.
Financial statements, when timely and properly reconciled, may yield other indicators that warrant inquiry, such as:
- Depreciation that is high when compared to booked assets.
- Profits that are off compared to revenues or cash on hand.
- Balance sheet items (such as deposits, receivables, or payables) that never seem to clear.
Any of these can impact a bank's risk assessment of whether an organization can manage its investments and cash to service its debt and ensure business sustainability. As a result, clear, timely, and accurate financials should be part of a business's strategy to make the case that they are a good investment.
Cash Flow & Profitability
Next, a bank is going to look at cash flow and profits. On a basic level, banks want to know a business has more than adequate cash flow to meet any debt service now and into the future. This may require a shift in cash management strategy for a business. For example, if a business owner is used to maximizing the recognition of expenses to keep a tax bill low, this may lead to profits seeming too low to be a good investment for a bank. For some businesses, this will be a shift in strategic thinking as well as presentation of financial data (for example, weighing the short-term benefits of tax savings and the longer-term benefits of growth with some capital investment). For other businesses, this might be an opportunity for a health check (for example, if profits are too low for a bank to warrant a business as creditworthy, ask what the organization can do to better understand their business and grow their profits).
Some business owners may also have to evaluate the balance of their cash distributions as compared to business profits for the sake of investment. If owner distributions equal (or are in excess of) profits, it may appear that the owner is starving needed cash from the business to make adequate investments in growth. Again, this may take some strategic financial planning around the balance between tax liability, cash, and profits to meet ownership needs as well as to prepare for financing the business’s future (be it growth or a turnaround). The more the work here has been done before hitting a banker’s desk, the more successful a business will be in navigating its financing needs with a banking partner.
Comparable Financials
Additionally, a bank may also compare a business's financials with businesses in comparable industries. As an example, a bank is going to look at a restaurant differently than a legal firm or a manufacturing plant. Their expectations around things like gross margins, the balance of capital versus personnel expenditures, and overhead costs are going to be vastly different. If margins or other indicators seem out of skew with industry norms, this may warrant a deeper look into what is going on in the business. If your business’s margins are looking very low compared to the industry your business is benchmarked in, this may beg questions about the effectiveness or efficiency of the business as well as a hard look at its bottom line. This may flag additional questions or explanations, which a business should be prepared to understand and address.
Accounting Staff and Systems
Lastly, beyond the numbers, a bank may want to understand if the staffing and systems of your business are adequate to meet reporting needs for financing as well as any compliance and regulatory requirements. Significant turnover and gaps in staffing may flag concerns that financial processes could break down, impacting not only reporting but also crucial business functions like collections, paying bills, or inventory. They’ll also want the reassurance that a business has the expertise needed to carry out proper financial planning to ensure growth, as well as the strategic know-how to navigate unexpected changes or challenges. A forecast or business plan is only as good as a business's ability to execute or adjust as conditions change, which means a banking partner will want some confidence that a business has this covered. They don’t want to invest in an empty plan or one that can’t weather changes in business conditions.
In some banking environments, applying for a loan is a faceless, data or metric-driven process with little leeway to present more than cold hard numbers and a credit score. In others, you may have a relationship with a solid banker who feels they are on your team. They will try to find the best products for your business needs at the best rates or make sure you are taken care of as your business needs change. This person will want the bank to make its numbers and not lose any “bets,” so to speak, but they also want to see your business succeed in its goals.
In reviewing your financials and application/proposal for financing, a banker may see the potential but need more (like greater confidence or sophistication in the financials and plans) to help see a financing deal over the finish line with their underwriting team or to make sure they are balancing the right financing products for your business needs. As a result, they may recommend you talk to an accountant or a Consulting CFO to offer assessments on the financials or systems, or to provide ongoing expertise in strategic financial planning.
Our banking partners, while not accountants or CFOs themselves, may see potential flags before you do as an owner or manager. Or they may see some additional outside technical or strategic expertise as a pathway to threading the needle of getting a financing package through to meet your business goals. And our firm, in providing outsourced accounting and consulting CFO services, can offer our extensive expertise to augment the accounting and business planning that is happening on staff.
A bank's value is providing resources for investing in transition and growth, and ours is in helping a business be successful in getting there and thriving beyond. Contact us to find out more today!
About the Author
Vega Tom brings fourteen years of non-profit accounting, finance, and strategic leadership experience. After starting her career as a construction bookkeeper and office manager, she quickly shifted gears to pursue non-profit work. Driven by a passion for social justice and equity, she transitioned to be the bookkeeper and human resource coordinator for the Hospice of Washington County.
Expanding her leadership skills and experiences with mission driven staff, Vega grew in her roles to become Director of Finance for a non-profit daycare center and on to Chief Operating Officer of a women's empowerment organization called World Pulse. She also worked with 211info as CFO and the Native American Youth and Family Center as Director of Finance. Additionally, she has experience providing consulting services to small businesses and non-profits on financial systems, budgeting, human resources, and strategic planning.
