This golden rule can apply to just about any aspect of running a business, from communicating with staff to dealing with customers and suppliers. But it is just as vital to the relationship a business owner has with their banking institution. When the market sours, the bank can be the lifeline that means the difference between throwing in the towel or hanging on until conditions improve.

Too often business owners engage in a purely transactional relationship with their bank to serve the day-to-day and monthly needs of their business. The bank may have a poor or limited understanding of the business, the markets its serves and the typical cycles it endures. When the business is struck by tough times and finds itself going hat in hand to the bank to secure credit or re-negotiate the terms of a loan, it may not find the help it needs.

It is always more difficult to solicit sympathy – and more importantly, help – if you wait until the situation is desperate to begin the conversation. Banks want to mitigate risk and ensure their investment in your business will not end up accounted for in their loan/loss provisions. Your desperation makes them nervous.

To establish a positive relationship with your bank and ensure the help will be there when you need it most:

• Understand how your bank works. Most banks have a range of services tailored exclusively to businesses of various sizes and scope. Understand where you fit as a business customer and who has responsibility and decision-making authority over your account. Not just the title of this person, but who they are by name.
• Get to know this individual. Sit down and discuss your business with them. Often, this person will be more than willing to pay a house call and discuss in detail your business and its current and future needs.
• When times are good, secure a line of credit. Build a track record as a reliable customer by regularly drawing on it and consistently paying it down.

Keep your bank honest

On the other hand, your bank is in business to serve you, the paying customer. Approach this relationship with the legitimate expectation that you deserve and can expect attentive and courteous service. You do have the right, at any time, to take your business elsewhere.

Our banking system is typified by a fee-for-service structure. Businesses in particular are on the hook for Visa/Mastercard merchant fees, points rewards plans and other costs which nibble away at margins. Beyond these are the fees associated with everyday banking transactions, the interest rates on credit cards, and of course, the cost of borrowing through a line of credit or a loan.

Most if not all of these costs are negotiable to some degree. Having established that track record as a good customer through timely payment of your bills, combined with years of loyal patronage, deserves to be rewarded with better rates and reduced, if not waived, fees.

Banks, however, are often slow to offer such rewards unless you make a point of asking for them. Don’t be afraid to shop around and see if you can find more competitive terms elsewhere that you can use as polite, but firm, leverage. Your bank, just like your own business, should be willing to give a little to keep a good customer rather than have to find a new one.

The Issue

You’ve been in business for a few years, maybe longer, and have been rightfully focused on building it up and growing sales. You know you have been successful because there is always money available at the end of the day. But growing sales is only one side of the profit coin – the other is management and control of costs and expenses. Managing and reducing costs to optimize profit margins gives you a competitive edge, and especially when times are tough, better leverage.

Businesses that take steps to ensure their operations are as lean and efficient as possible in tough times are not only more likely to survive, they will emerge that much stronger when conditions improve. But to understand where there may be fat to cut, you must first understand your cash flow and your financial business model – what your business looks like in terms of revenues and costs.

What to do?

For starters, get your accountant to provide you with a Profit & Loss (P&L) statement and identify and explain what flows into each line/cost item. Challenge everything and anything. Does each item make sense to you and align with your understanding of your business? Do you understand what are fixed costs, variable costs, direct costs and indirect costs? What ability do you have to influence them – in the short term, in the long term?

• Look at ratios, percentages and margins. Review labour costs as a percentage of sales; cost of goods sold as a percentage of sales and gross margins. Regard ALL line items as a percentage of sales. After all, it is your sales that pay the bills for everything else in your business.
• Perform a trend analysis on historic data with side-by-side comparisons of spreadsheets that show P&L, with the ratios and percentages, for each year. Look for any changes in ratios over time, find out the reasons for these changes and determine if the changes make sense in light of your business development. Address any that don’t!
• Benchmark ratios and margins against other successful businesses in your industry. Draw on your accountant’s experience, your peer network, and data from chambers of commerce, market research firms, or professional associations (such as retail and manufacturing associations, depending on the business and industry your are in). See if you are under-performing relative to these benchmarks. If so, do you know why, and what can you do about it. If you are doing better, can you leverage this advantage?
• Prioritize your costs/expenditures. Divide everything into two lists – Must Haves versus Like to Haves that are not necessary. Get rid of any items that are not necessary to the operation of your business and ensure you have the right controls in place to keep them out. A lot of hidden costs can creep up in this category – such as interest on outstanding credit card payments, banking fees, travel and entertainment. Many of these items may be slumbering under “Miscellaneous,” so monitor this line item to keep it in check. You can look at optimizing some processes around these (such as banking fees) and balancing them against cash flow requirements. Employee expense claims in particular can be an area where poor oversight can quickly lead to weaker margins.
• Set targets and make budgets using a planning tool with monthly, quarterly, or annual P&L statements. Identify whatever strategies you need to meet the targets and implement them. This includes optimizing processes such as approving and paying invoices. Are invoices circulating for days before they can be approved and paid? Are you making the most out of early payment discounts? Consider a purchasing order process. Many accounting software packages already include modules for this, otherwise it can be done with Excel. There are two benefits:

i) Purchases are approved upfront, prior to the invoices arriving, making invoice processing much faster.

ii) It gives you that much more transparency on upcoming expenses and payments, and therefore more flexibility to be pro-active in managing your costs (and cash-flow).

• Consider using credit cards as a method of payment wherever possible and collecting points that can be used to cover travel costs. But always be sure to pay off credit card bills when due. Cover any cash-flow deficits with a line of credit, not via expensive credit card interest rates.
• Move payroll as much as possible to a monthly cycle and electronic payments. 
• Challenge suppliers for better terms and switch fixed costs to variable ones. Take a good look at any flat rate fees you pay, especially for services, and the volume and frequency of use of these services. Are you using all that you are paying for, or would you be better off arranging a more discretionary use and payment? Track your performance and analyze variances to ensure you understand them and they are justified.
• Lastly, involve your employees. The expense claims cited above is only one example of the myriad ways that employees can impact your cash flow and the costs that eat into profitability. Ensure they have a clear understanding of the influence they have, both positive and negative, on the overall financial health of the organization.

The issue

Business people know that their business cannot effectively operate without proper cash flow. The issue is to gain an understanding of the details of your businesses cash flow needs, anticipate problems and have solutions. In general if your cash flow has deteriorated and the bank is calling you to repay a demand loan or you cannot make payroll for your employees, you have reached a point in your business with limited options. If you plan properly, you can hopefully avoid this problem.

First: Gain understanding of your business cash flows

Gain an understanding of what cash inflows are generated by, and what cash outflows are required by,  your business on a monthly basis. Review prior monthly financial information (financial statements, bank statements) for historical data and trends and really understand your business’s ability to generate cash and consume cash.

• If you are a retailer, when do you pay for your inventory and how soon does that inventory result in cash inflow to the business?
• If you are a business which sells on payment terms, know what the average collection period is for a sale. Sales are not cash flow if you cannot collect the cash.
• How much do you purchase from suppliers, when do you make the purchases and what are the payment terms to your suppliers?
• Does your business have periodic payments such as insurance which could be paid over 12 months instead of a single payment?
• Know when your GST and income tax liabilities are due. Do not ignore the required remittances and instalments as the government will not let you borrow from them and there are consequences for personal liability, as well as interest and penalties costs, if your business stops making required payments.
• If your business has a cycle of slow sales periods each year, review how much cash you need to have to get to the next busy sales period. This means knowing what the cash consumption of your business is each month for rent/ mortgage payment, salaries, communication costs, vehicle payments and operating costs, and similar costs.
• Integrate your vacation into the cash flow. If you’re absent on vacation, the business may not be selling (if you are a consultant) or you are paying for someone to replace you while you are away.
• Integrate your personal cash needs from the business. Understand when you will need to take cash from the business for personal needs. Be realistic. If you cannot take cash from your business to live, the personal stress may affect your ability to operate the business.

Second: Use your understanding of your business cash flows to create a planning tool

Use the above information to create a detailed cash flow statement for a six- to 12-month period. The Entrepreneurship Centre can assist you in details of how to prepare this document. The cash flow statement is meant to give you information so you can anticipate cash flow challenges in your business. 

Why take time to create this cash flow statement?

• You need to understand your business before you can ask others to help. If you need an increased line of credit, it is better to anticipate that need than to ask for an increase at the last minute to allow the business to meet a payroll obligation. Lack of information indicates that the business is controlling you.
• It is difficult to make purchase decisions and hire staff if you cannot anticipate business cash flows.

You have to make estimates of future cash inflows from sales. While actual results will vary, you now have a cash flow statement tool to allow you to plan, adjust and react.

Third: Cash flow problems will happen – how to react

Virtually all businesses will have cash flow problems at some time in the life of the business. Slow sales consume cash and so can rapid growth. There is no ready solution for all problems, but review your alternatives. Communication with your employees, suppliers and the bank will be critical to get them on board and trust that you have identified the problem and are working on a realistic solution:

• Determine if the problem is a temporary (large cash outflow for unexpected repairs) or longer term (loss of a major customer, new competition driving down prices). If temporary, consider approaching suppliers or your landlord to defer payment for a month. If you have a mortgage, ask the bank to rearrange principal payments for a certain period. Consider temporary layoffs or job sharing to reduce labour costs. Review your business assets and sell redundant assets to create cash flow. Consider selling inventory at reduced prices to create cash flow.
• If longer term problems exist, review your ability to borrow against your home equity or refinancing existing debt. Consider selling required assets and leasing them back from the purchaser to create cash flow. If the business is at a growth stage where you cannot finance the growth and the bank will not provide further borrowings, consider a business partner who would inject cash into the business.