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Banking relationship | The CFO Centre

Improve your banking relationship

Baking Relationship | The CFO Center

Developing a strong relationship with your bank provides tremendous benefits including offering necessary funding, preferential rates, and better terms. Your bank can provide expert financial  advice and help you to find solutions to financial challenges. It can also help you to grow your business and reach your financial objectives.

Since your bank works with a wide variety of businesses, it can also be an excellent source of prospective vendors, partners, and customers for your business.

As banks deal with SMEs in every industry, they are also an excellent source of information and advice about marketing, expansion, fraud prevention, and e-commerce. Some banks take the initiative and offer their customers business ideas and opportunities. So if you don’t have a strong relationship with your bank, you’re missing out in many ways that could help your business to prosper.

Very few business owners appreciate the value of having a strong relationship with their bank.

Why you should develop a strong relationship with your bank

Having a borrowing history and a solid relationship with your bank will make it easier for you to get credit.

It’s important to educate the bank on your business, your strategy, and your financials so that they are fully aware of your business and the vision you have for it, says banking expert, Peter Black of Snowball Consulting.1

Banking Relationship | The CFO Centre“You need to have a good relationship with your bank,” says Black. “If you treat the bank as a commodity and don’t tell them anything, then when you need them most, they may not be there.”

“Tell the bank the good and the bad news in equal measure, as and when it occurs,” recommends Black. “If you have a new contract or a good story, tell the bank about it. Many don’t do this.”

There’s more to it than regular phone calls, however. You also need to demonstrate that you have a coherent strategy and follow it, says Black. That will help to establish your credibility too.

“Continually changing the strategy or appearing to move from one to another does not give the bank confidence,” says Black. “The worst situation to be in is one where the bank does not even understand your strategy.”

Make sure the forecasts you provide are realistic and credible, recommends Black. “The bank will build up a history of how accurate the forecasts are that a business provides. No forecast can ever be totally accurate, but the banks see no end of forecasts showing a massive increase in profits and cash just to underpin the latest request.”

Let your banker know about regulatory changes that could have an impact on your company’s growth opportunities.

Banks need to know:

  • Who your customers are
  • Who your vendors are
  • What is going on in your industry

For that to happen, you need to establish regular communication with your bank manager.

Share your company’s long-term strategy with the bank. Your bank may be able to provide additional resources to help you achieve your goals.

Schedule regular meetings with your bank throughout the year so that he or she gets an accurate picture of your business. It will also make it more likely the bank will respond faster when needs or opportunities occur.

Baking Relationship | The CFO CentreThe stronger your relationship is with your bank, the better they will be able to understand your business when you come to them for advice and solutions to help it grow. Banks know things don’t always go as planned. They want to be comfortable that they understand your ability to deal with these situations and make good decisions to improve, building a track record with them based on trust, sharing information and debate. It’s astonishing how many business owners don’t invest in building a track record and strong relationship with their bank.

At a recent event focusing on how to build a world-class finance function, CFO Centre Group CEO, Sara Daw, found only four out of 50 business owners who attended considered their bank was a strategic partner to their business. This is far too low. At The CFO Centre, we make building a strong value-adding relationship with your bank a priority.

If you don’t have a good relationship with your bank manager, you’re missing out on more than a possible future credit facility. You’re missing a valuable free resource for advice and information.

Your bank can provide a regular evaluation of your business and financial strategy, as well as ideas and solutions to overcome many challenges you might face.

Banks also offer a wide array of services including:

  • Cash management tools
  • Credit card processing
  • Online and mobile banking services

Since banks deal with SMEs in every industry, they are also an excellent source of information and advice about marketing, expansion, fraud prevention, and e-commerce.

Banking Relationship | The CFO CentreThey can walk you through your balance sheet and explain how they perceive your finances and business. They can also learn more about where and when you’re likely to need the money to grow the business.

Giving information and asking for advice helps to build trust between you and your bank manager. Gradually, you learn to trust their advice and they begin to trust in your ability to repay your loans.

Banks hate surprises so if your business is encountering problems, it’s important to let your bank manager know as soon as possible. If you know that you’re likely to miss payments or be late in paying vendors, let your bank manager know in advance so they can assess the situation and provide you with options.

This will also demonstrate to your bank manager that you can manage the business and also be trusted to inform the bank before the problem gets worse. Your bank manager might even be able to extend your line of credit or temporarily waive your fees.

You can increase your chances of getting a loan or credit extension by demonstrating your ability to repay, whether it is a short-term overdraft or a longer-term loan. The bank will expect to see the proof so you’ll need to provide the following documents:

  • Your track record
  • Your previous results
  • A business plan (which needs to cover how the company started, your products/services; the management of the business and its plans for the future; market research undertaken to support assumptions and forecasts; and your financial requirements)
  • Your last audited accounts
  • Current and up-to-date management accounts
  • Accounts Receivable and Accounts Payable lists
  • A budget for the current/next trading year
  • A cash flow forecast

How a part-time CFO will strengthen your banking relationship

Baking Relationship | The CFO CentreMany business owners are uncomfortable speaking with their bank manager. Owners and CEOs often do not know how to communicate their business strategy and needs to the bank and do not know what information the bank needs to support their funding requests. This is where an experienced CFO can be an essential part of your team; someone who understands how banks make their decisions and can, therefore, position your application for a greater chance of success.

Your part-time CFO will:

  • Develop a relationship with key personnel at your bank.
  • Share information about your business with the bank and keep the bank fully updated. The more trust that can be built the more the bank will be willing to help.
  • Provide the bank with a credible business plan which takes into account previous track record including debt and cash flow history.
  • Provide you with independent advice on bank products and their suitability.
  • Negotiate the best deal on bank facilities.
  • Provide access to senior contacts in the bank where required.
  • Introduce new banking options if needed and negotiate terms.

Your part-time CFO will work hard to forge a strong relationship with your bank so that when you need access to any of the bank’s services your request is treated as a priority.

What’s more, your part-time CFO has many years of banking experience so can advise you on the best banking deals.

Your part-time CFO knows where to go for supplementary funding to complement your bank finance (if necessary) and how to benchmark funding deals for your peace of mind.

CFOs can skillfully communicate your needs in a way that appeals to bank managers. That helps to add further credibility to your credit application.

Conclusion

Your bank can play a significant role in your company’s future growth, both in terms of providing necessary funding and strategic advice.

That will only happen if you take the necessary time and energy to foster a relationship with your bank manager. The benefits of doing so, however, make it one of the best investments you’ll make.

1 ‘How to get the most out of your banking relationship’, Black, Peter, Forum of Private Business, www.fpb.org

LEGO_Logo

A True Toy Story: LEGO’s Incredible Turnaround Tale

The story of how LEGO, the family-owned toy company went from teetering on the brink of disaster and haemorrhaging cash to delivering the highest revenues in its entire history and being voted the 2017 Most Powerful Brand in the World makes for a truly inspirational tale…

Fourteen years ago, LEGO’s Head of Strategic Development Jørgen Vig Knudstorp delivered the kind of assessment that most managers would gladly superglue their own ears shut to avoid hearing.

“We are on a burning platform, losing money with negative cash flow and a real risk of debt default which could lead to a break-up of the company,” warned Knudstorp at that meeting.

He’d discovered during six months of examining the company that there was a lack of profitable innovation, according to David C. Robertson, author of ‘Brick by Brick: How LEGO Rewrote The Rules Of Innovation And Conquered The Global Toy Industry’.

“LEGO had plumped up its top line, but its bottom line had grown anorexic. All the creativity of the previous few years had generated a wealth of new products, but only a few were actually making money,” wrote Robertson. “To make matters worse, the LEGO Group’s management organization and systems, shaped by decades of success, were poorly equipped to handle a downturn.”

The company’s management team—twelve senior vice presidents who oversaw six market regions as well as such traditional functions as the direct-to-consumer business and the global supply chain—didn’t collaborate but instead operated in their own silos.

The result was that the LEGO Group was expected to suffer a thirty percent fall in sales with £193 million in operating costs. It had a negative cash flow of more than £124 million.

By the end of the year, it was likely to default on its outstanding debt of nearly £620 million. Its net losses were likely to double the following year.

Knudstorp’s stark assessment should have come as no surprise. Something was going badly wrong at LEGO HQ Denmark: in the years from 1932 through to 1998, the company had never made a loss but from then on, the losses had increased year by year. First, there had been a little loss in 1998 but by 2003—the year of Knudstorp’s no-holds-barred assessment—that had grown into something deeply worrying.

Much worse results followed a year later when the company recorded its biggest ever loss of about £217 million. By then, Knudstorp had been appointed CEO.

“In 2003, we pretty much lost thirty percent of our turnover in one year,” he told Diana Milne in ‘Business Management Magazine’.

In 2004, the company had a further ten percent fall in turnover. “So, one year into the job, the company had lost forty percent of its sales. We were producing record losses and cash flows were negative. My job was how to stop the bleeding.

“We had to stabilise sales and cut costs dramatically to deal with the new reality of selling forty percent less than we had done two years earlier. We had too much capacity, too much stock. It was sitting in the wrong countries. The retailers were very unhappy.”

Knudstorp, a former McKinsey analyst, told James Delingpole of the ‘Daily Mail’, “We had a dress rehearsal of the world financial crisis: a strong decline in sales and a massive increase in our indebtedness.”

The losses were partly a result of the company’s attempt to diversify in the late 1990s, in the belief its brightly coloured building bricks were losing appeal and were under threat from computer games and the internet.

It was coming under pressure from other toy manufacturers since the last of its plastic toy brick design patents had run out in 1988 and the monopoly it had enjoyed for so long in the plastic toy brick market had begun to erode.

LEGO’s diversification saw it expand the number of theme parks it owned in a bid to help increase visibility of the LEGO brand across key markets. This was despite it having little hospitality experience. Unfortunately, these capital-intensive developments didn’t provide anywhere near the expected returns.

And the company had dramatically expanded the number of products in its portfolio, according to the ‘Brick By Brick’ author. In the years 1994 through to 1998, it had tripled the number of new toys it produced.

“In theory that was a good thing: experimentation is the prelude to real progress,” wrote Robertson. … “Problem was, the LEGO Group’s once-famous discipline eroded as quickly as its products proliferated.

“Production costs soared but sales plateaued, increasing by a measly five percent over four years,” Robertson said.

The company had little idea which products were making money and which were failing to produce an adequate return on the sometimes-heavy tooling investment, according to a case study from John Ashcroft and Company.

LEGO had even created its own lifestyle clothing range and brand shops and launched its own TV series, DVDs and video games.

So, by the time Knudstorp delivered his assessment, the company was in serious trouble.

The Turnaround Begins…

Which is why with the help of Finance Director, Jesper Oveson (former Chief Financial Officer of one of the largest banks in Scandinavia, the Danske Bank), Knudstorp began to make sweeping changes.

Oveson discovered there was an inadequate degree of financial analysis within the company. While there was a profit and loss account by country, there wasn’t product analysis or line profitability, according to John Ashcroft and Company. In other words, the company didn’t know where they made or lost money. Likewise, the theme parks were a massive cash drain but no-one knew why.

The two men decided on a short-term life-saving action plan rather than a long-term strategy for LEGO, which would involve managing the business for cash rather than sales growth. Key moves included:

  • Setting financial targets. Ovesen introduced a near-term, measurable goal of 13.5% return on sales benchmark and established a financial tracking system—the Consumer Product Profitability system. It measured the return on sales of individual products and markets so the company could track where it was making and losing money. Every existing or proposed product had to demonstrate it could meet or surpass that benchmark.
  • Cost-cutting (including cutting 1,000 jobs)
  • Improving processes (many processes were outsourced which meant employee numbers could be cut by another 3,500)
  • Managing cash flow
  • Introducing performance-related pay
  • Reducing the product-to-market time.
  • Selling the theme parks and slowing retail expansion.
  • Cutting the number of components from almost 7,000 down to about 3,000.

The result of these and other changes was that LEGO recovered and went on to become the most profitable and fastest-growing toy company in the world. During the worst of the recession in the years 2007 through to 2011, for example, LEGO’s pre-tax profits quadrupled. Its profits grew faster than Apple’s in the years 2008 through to 2010.

LEGO the Super-Brand

LEGO’s success has continued. Earlier this year, LEGO (now being run by Bali Padda as Knudstorp has moved into a role where he can expand the brand globally) announced its highest ever revenue in the company’s 85-year history.

And it overtook Ferrari and Apple to be voted the world’s most powerful brand. Each year, Brand Finance, a leading brand valuation and strategy consultancy, puts thousands of the top brands around the globe to the test to find the most powerful and most valuable of them all. This year, LEGO won.

“LEGO is the world’s most powerful brand,” it announced. “It scores highly on a wide variety of measures on Brand Finance’s Brand Strength Index such as familiarity, loyalty, staff satisfaction and corporate reputation.”

Its appeal to children and adults in this tech-centred world also garnered praise from Brand Finance.

It continued, “The LEGO movie perfectly captured this cross-generational appeal. It was a critical and commercial success, taking nearly $500 million [£338 million] since its release a year ago. It has helped propel LEGO from a well-loved, strong brand to the worlds most powerful.”

Which goes to show that even when disaster seems certain, it is possible to revive an ailing company. Of course, it helps to have a top-level financial advisor working with you to ensure the changes you’re making are the right ones.

What To Do If Your Company Is Suffering A Cash Flow Crisis

If your company is in dire straits, take action now—don’t imagine you can wish the crisis away or continue to do whatever you’ve been doing in the hope things will get better. They won’t.

Until you identify and fix your cash flow problems then put systems in place for managing cash flow, your company is at a very grave risk of insolvency.

Without well-defined and well-managed strategies to avoid running into cash flow problems and a plan to improve cash flow if such problems should arise, your company will continue to flounder.

Fortunately, you don’t have to do it alone. The CFO Center will provide you with a highly experienced part-time CFO with ‘big business experience’ for a fraction of the cost of a full-time CFO.

He or she will assess your company’s cash flow position and take the following steps:

Identify and address all the immediate threats to your business

Prevent cash flow problems from recurring and

Instigate the use of regular cash flow forecasts.

Having control of your company’s cash flow will allow you to operate within your means, and move away from a ‘feast and famine’ situation that plagues even the largest companies.

Having the right cash flow management processes in place and being able to spot peaks and troughs in trading to improve cash flow is one of the most critical components of any finance function.

Put an end to your cash flow problems now by calling The CFO Center today. To book your free one-to-one call with one of our part-time CFOs, just click here.

Sources

Brick by Brick: How LEGO Rewrote The Rules Of Innovation And Conquered The Global Toy Industry’, David C. Robertson & Bill Breen, Crown Business, 2013

How LEGO Became The Apple Of Toys’, Jonathan Ringen, ‘Fast Company’, August 1, 2015

How LEGO clicked: the super-brand that reinvented itself’, Johnny Davis, ‘The Observer’ magazine, June 3, 2017

LEGO Annual Report 2016’, www.LEGO.com

‘The LEGO Case Study 2014’, John Ashcroft and Company

‘When LEGO lost its head- and how this toy story got its happy ending, James Delingpole, ‘The Daily Mail’, December 18, 2009

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