On-Site's Construction Forum
Cash is king when securing financing
by Jerry Henechowicz
Since the beginning of the banking crisis in late 2008, a company’s ability to secure financing has become increasingly difficult. This has put more and more pressure on the building and construction sector as it faces limited growth, weak demand and rising interest rates
This trend is expected to continue for the foreseeable future as banks and other traditional lenders minimize risk by choosing only to do business with proven, well-established companies. However, smart business owners can work with their financial team to develop solid financial strategies that will ensure sufficient liquidity and financial flexibility which is imperative for success. And with diligent planning and foresight, there could be opportunities to turn these difficult conditions to your advantage.
Get the right financial team in place
A good financial advisor can help you to develop a robust financial program that will help to navigate your business through a turbulent economy and maintain the confidence and support of your lenders. Consider scheduling monthly or quarterly meetings with your key financial advisors and solicit their advice on best practices for financial modeling and budgeting. They should be proactive in providing you with the information needed to stabilize operations and to prosper in today’s challenging market.
Make financial forecasting, reporting and monitoring a priority
Work with your financial team to accelerate financial forecasting to a monthly or a bi-weekly schedule. This will allow you to keep on top of cash flow, changing costs and profit margins and become proactive in identifying and mitigating potential problems. Your forecasting and monitoring methodology should be continuously reviewed and updated to be in line with the changing economic landscape.
Maximize cash flow
Once you have a solid understanding of the businesses’ financial situation, your next step should be to implement strategies to maximize cash flow. As the lifeblood of any business, Cash may be more meaningful to lenders than earnings. As the saying goes, “profits are an opinion, but cash is a fact”. Earnings without matching cash flow growth will raise red flags.
There are many strategies you can employ to maximize cash flow. For example:
- Take a critical analysis of all your operations to understand the impact of each component on liquidity and operations funding.
- Be diligent with your accounts receivable collection efforts. If a customer believes they can use you to finance their own cash needs, they will. Be subtle, but as firm as necessary.
- Contract inventory and other consumables to the lowest possible level without jeopardizing operations.
- Negotiate with both customers and suppliers to get the best rate. This shows your banker that you are making every possible effort to maximize your cash.
Get close to your banker
Regardless of the size of your business, developing and maintaining a healthy relationship with your banker key to success. Given the current state of the economy and credit markets, banks are significantly more cautious and concerned about lending to business that they don’t have a relationship with. Even so, you should expect far more scrutiny from the bank and far less flexibility.
Your relationship with your banker must be clear and transparent. Demonstrate your specific financing requirements clearly and articulately. Don’t try to conceal any past problems as doing so could create a climate of distrust. Banks are not shareholders in your business and need continual reassurance that the risk taken in extending credit is worthwhile in the circumstances.
Be proactive in sharing operating results, especially when results are not as strong as forecasted. Show the bank with your strategies for mitigating the impact of any project delays, cost overruns or other key project milestones. Should you not need a construction advance due to a project delay, let your banker know. Deferring construction advances without explanation to your lender will also raise concerns. Give your banker confidence that the management team has the operational know-how and cash flow management skills to navigate through challenging times.
With careful planning and a proactive approach, businesses can find ways to prosper, maintain liquidity and strengthen relationships with their banks.
Jerry Henechowicz is Vice-President of Fuller Landau LLP and concentrates on corporate restructuring and insolvency. Fuller Landau (www. fullerlandau.com) is a Toronto-based, mid-market public accounting and business advisory firm with more than 50 years of experience working with clients to develop business strategies that will facilitate profitable growth and help them adapt to changing market trends. Jerry can be reached at 416-645-6540 or email jhenechowicz@fullerlandau.com.