This is the fifth 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.
When Bad Plans Happen to Good People, Part 2
Ron: One of the things I see often in business plans is that the owners include a big salary for themselves. People have to live, but I always advise people that before they go to the bank, they reduce their lifestyle to something more modest. And don’t go into the bank with a big credit card debt (unless you have a legitimate reason to have it). They will see that and instantly think about the lifestyle and discipline it must indicate. In most cases, they need to demonstrate to the banker that they’ve taken a haircut — they’ve reduced their wages to do this — which again is showing they have some skin in the game. I don’t expect them to work for free, but if they’re showing me a business plan where they’re paying themselves $200,000 a year, and they’re going to lose $200,000 in that first year, I’m going to ask them why they don’t pay themselves $75,000 and only lose $125,000 that first year.
Greg: And let’s go back to the down payment idea for a moment. The more you put down, the less your interest expense is. The first thing I ask people when someone comes in looking for money is, “Why haven’t you paid off your cars?” They might have $100,000 in the bank, and they owe $20,000 on a car. Why not pay off the car loan and avoid paying the interest?
If a banker wants you to put 20 percent down, and you have the money to put 25 percent down and are willing to put it down, that banker is going to really think favorably about your request.
Ron: How do you feel about how fast a company can grow and what they should show in their business plan? Typically, people tend to over-forecast.
Greg: A lot of the business plans we get are hilarious. People think they’re going to become millionaires overnight. We’ll get pro formas that show they’re going to bring in a million dollars in revenue in their first month. I don’t know many companies that can do that.
Another thing people do on their pro formas is leave off the interest expense. Hello? They’re in a bank asking for money! Aren’t they going to pay me back? They have rental expenses for their warehouse space, but no rental expense for the money they want to borrow! Another common omission is tax expenses. If someone is going to make money, doesn’t it make sense that they’re going to be taxed on those profits?
Ron: I always tell people that bankers always ask for profit and loss statements, either quarterly or annually. Banks aren’t interested in a 28-page profit and loss (P&L) statement. They want to see the big expense items like the cost of goods and labor, and they want to see general and administrative costs. They might ask for some details, and a business needs to know those things if they do, but the bank is not that interested in all the details. It’s a little more work to boil it down, but one page is enough for a P&L. Condense all the smaller details, leaving material items shown, into what’s called a compiled statement. Your banker doesn’t care if your cleaning service charges $200 per month, when your monthly expenses total $75,000.
I’m amazed at what people will send to a bank. Never, ever send something to a bank without looking at it. Go over the numbers, see what they mean and think about it. As a business owner, I have to know and understand everything I provide to the bank.
Greg: Another important thing to do is put those annual or quarterly statements side by side and compare them. Any change of more than, say, five or 10 percent should be explained. Any kind of variance in revenue or profit needs to be explained. The bank’s going to want to know why that changed, and if the customer doesn’t know, how can he or she expect the banker to explain it to the loan committee? Bankers are big on variances, good or bad.
Ron: From an entrepreneur’s aspect, I have a different attitude. We know that most bankers are not going to study what I’ve given them, so I’m not going to show my banker all those changes.
If it’s all good, I’ll include that information and point it out. But if one of my expenses is bigger than it should be, I’ll put it in “general information” and won’t point it out. I’ve found that well over half of bankers don’t compare this stuff year after year, so I don’t see it as being critical. But don’t let that dissuade you from doing it for your own planning. You should compare the statements. And understand the differences. You are so dead if the banker does it and you don’t have an instant explanation, one including any required solutions. Bankers love candor, and they especially love someone that is on it, in control and that understands all the nuances of their business. You will be a great customer if you do this work – or have it done, but be on it.
Ready, Set, Grow…
Growth is a part of every successful business. In business plans, that anticipated growth is often wildly overstated. But too much growth is just as hazardous as no growth at all.
While many new business owners think that rapid growth is the ideal scenario, growth that occurs too quickly can result in the exact opposite. Nobody expects an infant to grow to adulthood in a year; it’s not healthy for a business to grow that rapidly, either. Knowing how much you can realistically expect your business to grow is key in creating a plan.
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.