Know your business and know your lender!

Those of us in the corporate finance business shudder when we see the “R” word popping up in various media reports. Our concern results from our past experiences, which have tended to be unpleasant, particularly with the lending community. Those borrowers that require nurturing and hand holding on a regular basis suddenly seem to lose their appeal almost over-night. What seemed reasonable with your lender last month is suddenly unacceptable.

If your business continues to push the borrowing envelope, if you feel that your banking relationship is “on the bubble”, you must prepare a comprehensive cash flow analysis, forecasting out for a minimum period of six months, prepared on a weekly basis. This project requires a tremendous commitment of time and energy, however, once completed, you and your management team will feel more in control. Focus on actual dates for paying bills, collecting receivables, scheduled inventory purchases and employee remittances. Update it daily. When preparing and updating your cash flow model, also consider and build in the following:

  1. Hold your sales forecasts to your historical experience. Use your previous year as a starting point. Gonfvirbfuddconschan . Allow increases only if there are firm orders in hand. Adjust your operating expenses to match the forecasted sales levels.
  2. Focus on your accounts receivable, split the serious accounts between your management team and push collections. Tighten your credit policies and remember that the margin generated on the initial sale is not important when you can’t subsequently collect.
  3. Walk the talk when it comes to reducing inventory levels. And get rid of out of date and surplus stock.
  4. Dispose of idle equipment that’s sitting around and no longer important to your production cycle.
  5. Tighten your employee and management team. Make some hard decisions if necessary re personnel.
  6. Keep current with all payroll remittances and HST.
  7. Isolate your particular lending covenant requirements such as debt to equity and margin ratios such that you can immediately identify in your forecast when a problem is likely to arise.
  8. Consider the implementation of temporary additional financing such as factoring or alternatively, an asset based finance approach.
  9. Share information with management and ask for their input.

Finally, make a detailed presentation to your lender. If there is a problem, show them how you are going to resolve it ahead of time. Impress your lender by demonstrating commitment and the ability to make critical and tough decisions. At the same time that you’re building credibility, you will be building a trusting relationship.

Norman Seawright, CA

Norman Seawright is President of NewCap Financial inc., specializing in providing strategic consulting services related to the buying and selling of businesses, corporate finance and corporate and estate mediation services.

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