4
money talk
By Stuart W. Margolis, CPA, MS
and Brian L. Enverso, CPA, MS, CVA
You and Your Bank
T
here is no question about it: The econ- again losing cash flow. Once a printer uses municating with the banks. So how do we get
omy has changed, the banking industry up cash reserves and credit, there may be banks to respond positively to our financial
has changed, and traditional relation- little alternative but to close the doors, as has needs? There are several steps to consider:
ships between printers and their banks have happened for some 2,000 printing compa-
changed. Helping printers find financing, em- nies out of 35,000 nationwide. Most banks 1) Increased communication is essential.
ploy strategic measures and keep strong cash are looking more carefully when assessing Keeping your bank informed and updated of
positions has been increasingly popular. To viability, applying measurements that are both good and bad news is important. Plans
explore the changing nature of bank relation- more stringent. One of the most important need to be developed, not only for the bank,
ships, we interviewed Kurt Knutson, president measurements used by banks is covenants. but for your own survival. These should include
and founder of Freedom Bank in Kansas City. The covenants could include: income and expense projections that can be
used to analyze cash flow and determine if it
From his experience in providing financing $ Total debt to equity—If total liabilities are is sufficient to service the debt and working
for printers, Knutson drew parallels between $2M and equity is $1M, the total debt to capital. A contingency plan also needs to be
today’s banking situation and the 1980’s equity ratio is 2:1. While each company and developed. Both should be communicated to
savings and loan crisis. He focused on the situation is unique, we generally see this ratio the bank, making them aware that you have
number of financial institutions going under, below 3:1 in covenants. considered the various scenarios and are be-
and the enforcement actions. “To put it in per- ing proactive in planning your responses.
spective, there are 8,300 FDIC-insured banks $ Tangible net worth—This again varies
across the country, and there are 40 banks greatly with each company. 2) Be patient and be prepared. Negotiations
that have failed,” (as of late August 2009), with banks take longer than before. Focus on
said Knutson. “The overwhelming number of $ Cash flow coverage—Cash flow coverage the operating side of your company when talk-
banks are doing fine.” The current economy is determined as follows: EBITDA = Net in- ing to them, showing where and how you have
and regulatory scrutiny also make banks very come + depreciation + interest. Debt Service cut expenses, why certain expenditures are
cautious about lending money even to their = Total of annual principle payments on debt necessary at this time, and how a short-term
best customers. As Knutson said, “The dol- + total of annual interest expense. The com- investment will increase future profits.
lars that are being lent are that much dearer parison of EBITDA to Debt Service is the Cash
to the banks, so they are looking at it from Flow Coverage ratio, which we normally see 3) Improve your management skills. Take ad-
the perspective that they have to be choosy ranging from 1.2:1 up to 1.5:1. vantage of the environment to plan, innovate