Short Term Cash Flow Issues – Unhappy Chats at the bank – August 2008
Short Term Cash Flow Issues – Unhappy Chats at the Bank
One of the symptoms of a credit crunch moving seamlessly into a recession is the chore of entrepreneurs spending more time with their bank manager.
This might well be to obtain credit to cope with a short-term cashflow, or to explain the restructuring required to take advantage of unpredictable market conditions. Whatever the desired outcome, this is unlikely to be a meeting which either party regards with keen anticipation.
The challenge is that the entrepreneur and the bank manager speak two completely different languages. The entrepreneur likes to talk about new opportunities, about making a difference and being recognised in the street. The bank manager is under strict instructions to reduce the risk in their portfolio of accounts, and can only express this in the language of the spreadsheet and the bottom line.
Meetings between entrepreneurs and bank managers can be tense and sometimes characterised by strong language. Many years ago, in my first start-up, our chief executive went to open a bank account. He was back very quickly and in a bad mood, so we realised it had not gone well.
In his view, the bank manager was an idiot; he had not understood how clever our chief executive was, how we had an unbeatable business proposition and how much money we all were all going to make, including the bank.
Our chief executive was ultimately right. We did sell the company for a lot of money five years later, but back on day one, we did not even have a bank account. Understanding finance is a challenge for an entrepreneur, especially if they come from a sales or technical background, as it is a very large topic with constantly changing rules. Chris West summarised this in simple terms in his book Finance on a Beermat , starting off with straightforward advice: before you do anything, find a finance cornerstone.
This is unlikely to be a full-time employee. Most people have a “virtual” finance cornerstone, someone who comes in perhaps one day a month and puts some order to the receipts and invoices in preparation for submitting the accounts.
There is an important distinction between an accountant and a finance cornerstone. An accountant is reactive; they will do your books and then tell you that you have gone broke. A finance cornerstone is proactive; they tell you that unless you do certain things, you will go broke at some time in the future.
Even if they only come in one day a month, they understand your business and can advise how to scale up operations when times are good, and how to scale down when they are not. Most importantly, they speak the language of the bank manager, and should always accompany you to any such meetings. The entrepreneur should leave the running of the meeting to the finance cornerstone.
If circumstances change and repayment terms need to be negotiated, this is best done by a professional who will present a case that is based on facts rather than emotions. In my first start-up, we were lucky that another of our shareholders was a vice-president of Goldman Sachs, and thus able to smooth things over with the bank. If you are not in this happy situation, then I recommend one of the organisations that provide finance cornerstones, such as The FD Centre www.thefdcentre.co.uk. Or you could ask your bank manager to recommend someone.
Finance on a Beermat by Chris West, Stephen King and Jeff Macklin is published by Random House Business Books.
Author: Mike Southon – www.beermat.biz