Be In The Driver’s Seat When Meeting Your Banker

Learning to Speak Banker-Speak

Over the years I have had many dealings with banks to finance the growth of our business.  It has been an interesting experience to say the least.  One thing I learned for sure is that I need to learn Bank Speak if I was going to get respect as an entrepreneur.  So what is bank speak you may ask?  It’s all about numbers and ratios.

• Total Sales – What is the total volume of business you will be doing and when
• Gross Profit – What’s your sales revenue minus the just the costs of doing the work (labor, equipment, materials and subs).  Efficient companies show a high gross profit.  They have high sales relative to the cost of doing the work.
• Net Profit – What’s your sales revenue minus ALL the costs of doing business, including overhead
• EBIT – What are the company’s earnings before interest and tax
• Labor to Sales Ratio – How productive is my staff?  What are my sales relative the costs of my labor?  The lower this number (the less of sales we spend on labor), the more productive we are.
• Material to Sales Ratio – How much of our sales are we spending on material costs for our jobs?
• Overhead – What are the costs of operating the business?  Are the owners paying themselves enough or too much?  Can the company support management salaries to help the owners?  Is there a history of steady income for the owners?
• Overhead Ratio – How much of our sales are we spending on overhead costs?  Is it high enough to grow a sustainable business, but low enough to be lean and profitable?
• Inventory – How much sales revenue is tied up in unfinished goods (materials waiting to be billed)?
• Cash on Hand – does the business have enough cash to comfortably cover the period between payables and receivables
• Cash Flow Management – Is the company paying it’s bills on time?  Also shown with Accounts Payable Turnover Ratio.
• Retained Earnings - Does the company have cash reserves?
• Credit History – Does the company string out its suppliers to support its operations

A typical business needs about 20% working capital to survive.  Working Capital is the money you have in your business for day to day operations:  making payroll and paying immediate payables. It is the cushion that keeps your head above water when receivables are slow.

To help stabilize working capital, banks can provide lines of credit to help with cash flow.  Companies in growth cycles can have as much as 50% of their revenue in receivables. In my business, primarily landscape construction, it is not uncommon to get paid in 45-90 days.  The analogy here is that it is not much good to throw someone a life vest after they have drowned.  Many businesses are profitable but still go out of business because there have insufficient funds to cover day to day operations or seasonal downturns in revenue.  Think about your business:  how many payrolls could you make if the money stopped coming in tomorrow?

Meeting My Banker

At our most recent banking meeting I wanted to borrow money for a large tri-axle truck.  The interest rate with leasing companies was over 8 % and the bank was closer to 4.5%.  This difference meant a net savings to my business $7000.00 in interest savings per year or $35000.00 over 5 years.

Using our Landscape Management Network budgeting software we were able to demonstrate the positive impact the new truck would have on our Equipment to Sales Ratio.  Our equipment costs, after financing the truck, increased by less than 1% as a total ratio to our total sales.  I pulled out my laptop and displayed the numbers on our big screen TV!  It was easy to demonstrate, conclusively, that we could easily afford to make payments on the Truck, even if it sat idle!

The good news however, was that our material ratio went down substantially.  We’d save on material costs buying in bulk, and we’d save on delivery charges.  Also, we were able to achieve big savings on our subcontracting costs for Trucking and Haulage. In fact, the purchase of the truck would actually increase our Gross Profit.  I could also demonstrate, with numbers, that our overhead was fixed and the truck was priced as a direct cost.  This meant that we were now paying down our own overhead instead of someone else’s while reducing our pricing to our customer.  Our new bill out rate(s) were more competitive and our vertical integration of this new service, which we used to outsource, actually added to net profit even if we didn’t see an increase in sales.

I then showed my banker some practical examples how our investments in efficiency were going to reduce waste and increase capacity.  No more waiting for the disposal bins to show up. The meeting was a slam dunk. They offered to lend us more money after that!

At the end of the day, you can run your business on intuition, but your banker is all about numbers.

Manage your numbers well and the bank will speak your language and help you grow your business.

Financial literacy starts with your budget.

George Urvari is a partner at Oriole Landscaping (http://www.oriolelandscaping.com/) – an award-winning residential design-build and snow and ice control firm from Toronto, ON and a member of the Landscape Management Network.  He’s got 25 years experience running a landscape business and is an active instructor, board member and volunteer at Landscape Ontario.