Many businesses have been heavily impacted by the corona virus pandemic and are surviving through the receipt of various government subsidies. These subsidies have been a welcome lifeline, but they are of limited duration.
(Yes this is rather long but so is the downturn. This is very valuable info for any business owner thinking about financing or re-financing. To get the most out of this, take a deep breath, make a cuppa and read right through!.)
What happens to your cash flow when the subsidies end?
Banks are being supported and encouraged to lend by the government, but it doesn’t mean that they will relax their lending criteria. We all know that they like bricks and mortar security. Many small businesses cannot offer bricks and mortar, so what can they do to gain the funding support that they need?
The next biggest factor in getting a loan is the bank having confidence in you, the business owner, as someone who really knows what’s going on in their business and, importantly knows what’s going on with the finances and cash flows of the business.
A properly prepared funding submission will go a long way to creating confidence. So, what should this funding submission contain? These are the key elements:
- There needs to be a detailed forecast of future sales and expenses, to show whether the business is going to be profitable. This is your Budget and it needs to be realistic and include all costs required to achieve targeted sales. i.e. if you target to double sales have you allowed enough for marketing, sales and delivery costs? It’s helpful to prepare several versions of this document based on best, worst and most likely scenarios. That way you will be well prepared for whichever is the final outcome.
- There needs to be a detailed forecast of future cash flows, operating, investing, and financing. This demonstrates to the bank your capacity to service and repay debt. It also demonstrates your grasp and control of the financial situation, particularly cash flow. It details where the ‘peaks and troughs’ are likely to occur in your cash position. It enables you to act upon cash flow inadequacies well before they become a problem.
- There needs to be a projected balance sheet. People don’t often see the value of the Balance Sheet. A Profit & Loss Statement showing a profit at the end of the year is great… the Balance Sheet sets out how the assets and liabilities of the business will cope with changes in the Profit & Loss Statement. For example, how will the bank account cope with a sudden spike in sales and a need for more stock/labour on jobs? It’s no good projecting a great profit, if the business goes bust in the middle before it gets to the end of the year.
- These three elements of the forecast are, in bank language, a ‘three-way forecast’. Properly prepared, this document makes it much easier for the banks to consider and meet your funding request.
- All the above forecast numbers need to commence with current financial data that shows exactly where the business stands at the commencement of the forecast period. (statutory accounts from two years ago won’t cut it). The financial data must be accurate and detailed to provide confidence you’ve got your finger on the pulse of the situation. This is often the biggest stumbling block in finance applications. Bookkeeping and accounting quality is sadly lacking and therefore information supplied to lenders can give an unfavourable picture of the real situation and the application for funds denied.
- And there needs to be a detailed written commentary that discusses your business plan and sets out the basis for the various assumptions that underlie the forecast numbers… a detailed operational plan of how you will achieve the sales targets including all costs associated.
Put yourself in the best position to get the funding you need by being able to submit a professionally prepared funding application.
These documents will not only tell you and your banker exactly what your funding needs will be but, as a bonus, will also point to ways that you can improve business outcomes. They are tools to help you manage profitability and cash flow improvement in your business… rather than documents to be put in the drawer and forgotten about.
Being able to provide this information in a timely and accurate fashion takes the stress out of funding applications. Also highly beneficial to lending applications, is access to someone who can answer questions from lenders, with a solid understanding of the business operations, as well as being able to interpret ‘bank speak’.
CFO On-Call is a team of CFO’s who act as ‘Financial Co-Pilots’ for businesses wanting to thrive… not just survive these challenging times.
If you’d like to learn more about your best business lending options and preparing an application click below.