Know Your Numbers
Are You As Smart As Your Banker?
This article will be of interest to you if your banker is important to your business, if you want to borrow more money, or if you want to improve the financial health and value of your company.
Phil’s Profit Points™ in Brief:
Bankers say that their most profitable and successful clients have a strong understanding of their numbers and have good financial management skills, people or both.
The critical metrics in your business, according to all the bankers I’ve interviewed, are cash flow, working capital, profit margins and leverage.
Critical banker ratios are your current ratio, debt to equity, and net income to gross revenue.
Your banker has a wealth of knowledge and advice about your business.
The most common complaint from bankers that I've talked to is that many entrepreneurs and business owners don't know their numbers.
We're talking about small businesses and some pretty good-sized businesses, $10 million or $20 million in annual revenues. Sure, they know operations and how to take care of the customer. But some don't understand their own financial statements and make major decisions based on gut-feel. This gives bankers indigestion.
Do you know your numbers?
Working capital - the cash necessary to pay your suppliers by collecting your accounts receivable and selling your inventory. How much working capital do you have? Two to three months would be a comfortable number.
Days to cash - how long does it take you to convert your labour and materials expenses into cash received from your customer? When you order a computer to be custom-made online, the company takes your money and then either assembles the computer (zero days to cash) or ships one out of inventory (could be 30 -45 days to cash).
Inventory aging - A Tim Horton's coffee shop drive-through restaurant turns its coffee into cash every twenty minutes and then it pours the 'old' inventory down the drain.
Accounts receivable - are the customers that owe you money all current and under 30 days? If not, are you your customers' banker? Do you have project hold-backs that are accumulating faster than your profits?
Debt to equity - is your total debt within two times your equity? Or, are you taking aggressive tax strategies to reduce your taxes, thereby driving down your profits and killing your retained earnings? Minimizing taxes is the best way to shoot yourself in the foot and prevent your company from being able to borrow money for growth.
Net to gross - is your top line growing faster than your bottom line? That is, are you working harder for less? Your bottom line should be growing faster than your top line.
Your accounting department or external accountant should be able to help you understand these numbers and set up a measurement system so that you can get this important information every month. If you're generating the information and sending it to your banker without looking at it, then your banker knows more about your business than you do. Only you can fix that.
By the way, the bankers told me that their most successful clients, with the most profitable and valuable businesses, know their numbers, and use this information to make wise borrowing decisions that accelerate their profits and growth. The information exists in your business. It's up to you to use it.
Tough Question
Are you using your banker as a money vendor or a strategic partner?
From the Piggy Bank
Bankers want to say ‘yes’ to your financing request. Are you presenting yourself and your information in ways that make them say yes?
Have a profitable week!
