Dealing with your bank – we can assist!
Increasingly we are having involvement with our clients in dealing with their bankers. In the current environment, even the strongest of businesses need to be mindful of their banking relationship. In many cases, this relationship is one of the more important relationships a business will have, yet many small business owners will overlook this fact.
In recent times, we have seen a shift in compliance requirements when dealing with lending institutions. In respect of existing facilities, this may be in the form of:
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A tightening of your bank covenants, for example, a higher level of required interest coverage, or a tightening of required WIP and debtors days;
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Increased relevance placed on your position with the ATO, and the need for a ‘clean’ integrated client account (BAS liability) and income tax account; and
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A higher level of statutory reporting in your reporting cycle. For instance, you may now be required to sign a statement indicating compliance with statutory liabilities including superannuation, workers compensation and payroll tax.
Overall the landscaping is changing, and you need to be acutely aware of your reporting obligations and bank covenants to ensure you are up to date and compliant. We suggest in all circumstances you keep communication channels open with your banking relationship manager, and reviewing your banking covenants regularly.
We are also seeing a shift in information requirements when our clients are applying for finance. In the past, banks were willing to accept a simple one page ‘cash flow budget’ when evaluating a request for additional funding from a client. We are seeing now though that banks are increasingly requesting a ‘3 way forecast’. Unlike the traditional one page report, this style of budgeting allows them to assess both the profitability and cash flow of a business. Whilst the distinction between profit and cash flow is often misunderstood, it is a critical aspect that banks want to understand when assessing your ability to service existing and proposed financial commitments. Many a profitable business has run out of cash!
Additionally, when preparing a bank loan submission, we suggest you consider the following factors:
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Can you pay the bank back – the serviceability test.
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Does your business generate sufficient operating cash flow to cover the interest and principal reductions, with room for a possible interest rate increase?
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Do you understand the quality of your cash flow – is the finance required to fund growth, or cover cash shortages due to poor financial performance?
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Is your business growth affecting cash flow? Do you have a plan to address this?
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Does your business have liabilities that will jeopardise the bank’s position, eg income tax, GST, payroll tax?
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Are your working capital levels appropriate and trending reasonably?
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Does the bank have sufficient security, or are you in a position to provide additional security?
At Addison Partners, our Business Advisory team can assist you when assessing your current position, and work with our network of professional advisers to ensure your banking requirements are handled appropriately. We are experienced in the preparation of 3 way forecasts, and can work with you in preparing one for your business, as part of your lending submission. Not only will it assist in your dealing with your banking manager (they will love this reporting!), it will also assist you as a business owner in analyzing the financial performance of your business. Contact us today on 02 4995 7300.