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Leveraging your financials: Part I

How to present the best face to the bank.



November 22, 2007
By Professor Steve Foerster

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As a professor in the Business Foundations program of Syngenta Grower University in partnership with the Richard Ivey School of Business, my focus is working with growers from across Canada to help them better understand financial management as part of their business. That may sound very basic, as running a business naturally means managing finances to achieve a healthy and profitable outcome. However, it turns out that not only growers, but a number of entrepreneurs actually dislike the ‘numbers' side of the business and would rather leave it up to their accountants to worry about. As you can well imagine, that is definitely not my suggested approach.

I would like to review some of the financial management basics discussed at Grower University and provide you with some tools and insights that will ideally help you feel more comfortable in effectively managing your financials as well as dealing with banks.

Getting ready
Before you even approach your lending institute, you will have to consider the key areas in managing your financials, including knowing how profitable your business is; your current and anticipated cash flows; looking at your projected financial needs; analyzing the cost of your financing (from banks as well as suppliers and equipment dealers) and finally, understanding your ability to grow.

Lenders want your business to be healthy and with strong growth prospects, but what are the key factors in determining that? First of all, you need to examine the external – economic and industry outlook – and internal – operations, marketing, and human resources – key success factors and have a solid sense of your business's strengths and weaknesses. This examination will help you understand the opportunities and risks, including the financial implications. Completing this exercise will also provide you with insights into how a lender will assess the viability of your business.

Sizing up your business
How does the bank determine how much to lend you and under what terms? First of all, they look at the external factors, such as the economic outlook and the overall industry assessment. Is the economy currently undergoing a period of expansion or does it look like a recession might be around the corner? What is the interest rate outlook? What about the impact of exchange rates on foreign sales or how commodity prices will affect profits?
In terms of the industry assessment, lenders will consider general market growth: what is the current state of sales and profits? How will the regulatory environment, social trends (aging populations) and technological advances affect opportunities and risks? Is there intense competition in the industry and generally, what are the overall key success factors?
The internal factors that influence the bank's lending decision have to do with your key business capabilities. For example, how well you manage your operations and information systems. What kind of processes have you put in place to help you manage successfully? How current is your equipment? Are your inventories low or high? Your approach to marketing is also a significant factor. Which crops you farm, how they are priced and where they are marketed, including of course the demand (corn growers have been good loan candidates in recent years) and any existing promotions through your growers' associations and so on, all play a role in assessing your ability to market your products.

Assessing the financial health of your own business is probably the most critical task you face in evaluating your overall eligibility for a substantial loan. However, this involves understanding and examining factors such as financial ratios, which is so critical that we will review this separately in a subsequent article.

How banks lend
Essentially banks lend on the basis of cash flows. They look at markets and competitiveness and rank industry risk based on economic outlooks and cycles. Your business strategy is also very important: what planning and systems are in place and how efficient are they proving? Management capability is a crucial factor, but also one of the most difficult to assess. The financial performance analysis using the balance sheet, income statements and cash flow trends are key. Finally, access to funds from other sources such as family, friends, partners or personal resources also determine the size of the bank loan, along with event risks that look at such things as environmental risks and one-time events, such as hurricanes, tornados
and so on.

Output of bank analysis
After analyzing all these factors very closely, the bank will determine your risk classification – low, medium or high – upon which the cost of your loan depends. A lower risk assessment will provide better borrowing terms. Although viewed as a ‘last resort' exit strategy by the bank, it will also evaluate your land, crops, equipment liens and potentially a personal
guarantee, if necessary, to fall back on in case of loan default. The bank may also advise as to specific covenants or restrictions to manage certain higher levels of risk.

Look for Part II: Assessing your financial health – the world of financial ratios in an upcoming issue. 


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