money talk by ProQuest


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                                                               money talk
                                                                  By Stuart W. Margolis, CPA, MS
                                                               and Brian L. Enverso, CPA, MS, CVA

                                                                                                                     You and Your Bank

                                                                    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
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