Keeping Your Bank Happy Made Easy
Nick Roberts
The recession has put financial pressure on many businesses. Debt covenants established in stronger trading periods are stretched and positive cash flow has proved critical as equity ratios have been eroded and higher profit multiplies on interest cover have been more difficult to achieve.
Not surprisingly, banks have changed their approach when reviewing facilities. They now assess four key risk areas:
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Trading strength;
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The industry and the expected timeframe for that industry to recover;
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The level of debt and servicing required;
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The management team driving the business and their capacity to practice strong corporate governance.
For management risk, bankers are assessing the following qualities:
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Preparation of monthly management accounts on a timely basis;
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The ability to provide annual financial statements within 90 days of year end which is common in many banking covenants but rarely been enforced;
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Regularly updated financial modelling which reflects current trading and extends out for at least 2 years allowing the identification of high’s & low’s.
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Whether strategic and business planning has been undertaken, is fully documented and relayed to the team for implementation; and
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The business has made changes to create efficiencies, improve cash flow, reduce unnecessary overheads and stay competitive.
In the current financial environment these are going to become the norm and are a strong signal to the bank of whether good governance is being practiced. Furthermore, given the availability of experienced advisers and cheap accounting/modelling software no longer are such requirements the preserve of bigger businesses! How many of the five has your accountant helped you achieve?
If you have any tax or business queries of any kind telephone 0800 ASK NICK, e-mail nick@abac.co.nz or use “Contact Us” on www.abac.co.nz. The information in this article is of a general nature and should not be relied upon as a substitute for specific advice.
