This is the fourth in a continuing series of articles from Ron’s newest book, Getting To Yes With Your Banker which includes 93 secrets you likely didn’t know about dealing with your banker. In a click and clack format, from an entrepreneur and a lenders perspective. It’s co-authored by Ron Sturgeon, a serial entrepreneur, and Greg Morse, Founder and president of Worthington National Bank with 4 locations in Tarrant County.
The book is packed with tips and advice on how to choose and get along with a banker, what they want to see, a must have guide for both start ups and existing business persons, featuring perspectives from both the banker and entrepreneur’s.
Covering the Bases from the Bottom Up
Ron: One thing that I like to do, and I know most people don’t do it that much, is called bottom-up planning. These days, it’s really easy to create a spreadsheet and create a top line where advertising costs are five percent, labor is 20 percent and so forth.
But what about the metrics? Like with the ice cream shop: how many scoops of ice cream are they going to sell? Once they’ve figured that out, they need to extrapolate that into how many cups and cones they’ll need to buy, how many freezers they’ll need, how many employees they’ll need to scoop all that ice cream. And if they’re going to sell 10,000 scoops a day, how many tables will they need, and how big will their lobby need to be to hold all those people, and how big a parking lot it would take to accommodate all those cars.
I would say that 98 percent of the business plans I see haven’t been looked at that way. Also, a bridge plan is needed for yourself, and the highlights for your banker. Visit my site (www.MrMissionPossible.com) for more information on bridge plans and bottom up planning.
Greg: That’s a problem we see a lot. I know of a couple of brothers from a foreign country who wanted to open a restaurant in a small town. When they opened a checking account at a local bank, the banker told them that in order to be successful, they needed to be able to make a great chicken fried steak. When they left the bank, the brothers asked each other, “What’s a chicken fried steak?”
Ron: And it’s not just new businesses. Once I was in a bank and overheard a conversation in the next booth. The guy sold parts and provided services for 1964 through 1966 Ford Mustangs, and he’d been doing this for several years. He’d been blindsided because all of a sudden his business had slowed down.
All I could think was, “How stupid is that?!” There are a finite number of 1966-1968 Mustangs, and how many people are out there to fix them? He hadn’t thought to expand into servicing modern Mustangs, or adding Camaros or some other car. So now he was in the bank trying to get a loan to get out of this bad situation he was in.
He had obviously been very unstrategic in his planning, and the banker had to be concerned about how he got there. I mean, who couldn’t see that coming? What does that mean, unstrategic in planning? It means that you think about what may happen, and then what happens as a result of that, good and bad, think about all scenarios. Beef up your plan accordingly, but you will also be prepared when the banker asks “but what if that happens?”
Greg: Sounds like that customer was trying to become the eight-track player of his industry. One of the problems we see a lot is that people are managing for the quarter, not for the quarter century.
Ron: That’s how they end up with “green weenies” in the business plan. A green weenie is exactly what it sounds like — a weenie that’s been left in the refrigerator for three months with the refrigerator unplugged … you might call it a very unpleasant surprise. A banker doesn’t want any of those.
And they aren’t there to give advice. I am amazed at the bankers who’ve told me stories about a customer who comes in and says, “I need some money but I’m not really sure how much. How much do you think I’m going to need?” That banker is absolutely not interested in giving them any advice — and probably won’t lend them any money! I am always amazed at the borrowers who ask the banker how much do they need. Isn’t that silly?
Greg: Another thing we don’t want to see is three years’ worth of monthly historical financials. When someone brings us a business proposal with thousands of numbers in it, we get lost. Bring us annual or, at the most, quarterly statements. I don’t usually need to see monthly statements.
Ron: But as an entrepreneur, I need to know what those monthly numbers are!
Greg: Sure, business owners need monthly numbers to figure out how they’re going to hit their projections. Because if you can’t measure it, you can’t manage it.
So gather your monthly numbers (metrics), but don’t think that the banker wants to see all of that. Too much data just drowns them, or triggers unnecessary concerns and anxiety for all. Not gathering monthly numbers is like playing a basketball game with the scoreboard covered up, then pulling the cover off at the end of the game to see which team won, without understanding the strategies, failures, and successes of the game. To a banker, numbers talk.
Ron: There are a lot of people who say that business plans are crap; they’re not really needed, they’re way too much work. I was guilty of that in my early years. But those people will never be as successful as they’d like. It’s hard work and it’s a lot of planning, but it’s not just for the bank, a business plan is so much more, and should be the road map you are executing against, measuring your success and making course corrections.
Greg: Right. Every company needs to have its own strategic plan. If someone has a goal and it’s not in writing, then it’s just a dream. As I said before, dreams don’t have a direction.
Ron: What else do bankers want to see? You want to see some skin in the game, right? What does that mean in terms of down payments and equity and those kinds of things?
Greg: Never go in and ask a bank for 100 percent financing on anything. I want the customer to have some skin in the game; maybe put down 20 percent on whatever it is he or she needs.
Let’s say someone comes to the bank and wants to finance a new bulldozer. The day it’s driven off the lot, it’s not worth the $100,000 it cost, it’s worth $80,000. As a banker, I’m already down to having something that is only worth what I just financed. And if the customer has some skin in the game, I know they’re going to lose some money if they have that bulldozer taken away.
Ron Sturgeon, founder of Mr. Mission Possible small business consulting, combines over 35 years of entrepreneurship with an extensive resume in consulting, speaking, and business writing, with 3 books published and 2 more expected in 2010. A business owner since age 17, Ron sold his chain of salvage yards to Ford Motor Company in 1999, and his innovations in database-driven direct marketing have been profiled in Inc. Magazine. After the repurchase of Greenleaf Auto Recyclers from Ford and sale to Schnitzer Industries, Ron is now owner of the DFW Elite Auto suite of businesses and a successful real estate investor. As a consultant and peer benchmarking leader, Ron shares his expertise in strategic planning, capitalization, compensation, growing market share, and more in his signature plain-spoken style, providing field-proven, high-profit best practices well ahead of the business news curve.
To inquire about peer benchmarking, consultations, expanding your business on the web or keynote speaking, contact Ron by calling 817-834-3625, by emailing rons@MrMissionPossible.com, by mailing 5940 Eden, Haltom City, TX 76117, or online at Mr. Mission Possible.