Dealing with financiers - how to impress them

Thursday 15 December 2011

By Ainsley Coggins, Accru Harris Orchard, Adelaide

Whether you are looking for new finance or just re-financing existing debt, your business presentation to prospective banks should paint a picture that leaves them wanting your business.  A thorough and well-thought-out business presentation will help ensure you get the best possible funding structure for your business in the quickest timeframe.

With the Global Financial Markets still volatile and uncertain, banks are becoming stricter about what they require before they will assess an application for finance.  If you are in business, certain things that used to be seen as ‘overkill’ in a funding application are now almost a requirement by most lenders.  

Realistic and thorough profit forecasts

Lenders are now consistently asking for profit forecasts where a business is looking for new finance.

It is great to have a forecast of profit for the coming year, but how many businesses take a close look at how they develop that forecast?  It is important to make sure there is logic behind the forecast, as well as it being achievable.  There is no point giving a lender a forecast which business owners don’t believe they can achieve.  This leaves the business open to more strict monitoring by their financier in the future.

It is also important to show prospective lenders that you have thought about the impact of cashflow on the profit forecast.  The cashflow forecast should not only take into account the profit projection, but also the new finance being applied for, as well the income tax liability expected as a result of any increased profits.

In developing the forecasted cashflow, it is also important to consider your payment terms for customers and creditors.  This will help identify areas of the business that should be changed or more strictly monitored so that cashflow is not an issue.

Lastly, lenders are always interested in seeing the expected equity position of a business at the end of these projections.  While the profit and loss projection gives information on profit earned, and the cashflow provides comfort about the ability of the business to fund the additional debt commitments, the balance sheet is the end result of these two projections, providing a snapshot of the net asset position of the business for the lender to assess the viability of the finance application.

Up-to-date financial management reports

While lodgement of annual tax returns is a requirement, it is wise to maintain up-to-date business records during the year, in case there is a need for bank finance.  It is a far less stressful exercise to have the current year trading information available at any point during the year, rather than waiting until there is a need to prepare it.

Actual vs forecast results after obtaining finance

Once finance has been obtained, lenders may be more interested in the current results of the business and ask for regular updates on trading results.

Whether it is on a monthly or quarterly basis, it is important to revisit the forecast which was set at the beginning of a year, and compare it to the actual results achieved.  Lenders are keen to be kept up-to-date on this front as well.  This exercise will highlight to business owners any issues that need to be addressed. These may include acknowledging the effect a loss of a contract has had on trading, or making a change to the debtor collection policy to improve cashflow.  

The opportunities for improving a business when comparing actual results with a forecast are endless.  For businesses who undertake this process for the first time, the overwhelming feedback is that they have learnt more about how their business operates and have often identified areas they need to concentrate on or which can be improved at little or no cost.

Forecasting may seem tedious but in the long run, a business can only benefit from its adoption, both internally and with external alliances.

If you would like assistance to prepare a finance application or a cash flow forecast, please contact your local Accru office.