Cash flow is essential for the smooth and successful operation of any business. While it is nice to think that your business will always have the necessary cushion of cash to allow for expansions, large projects, new hires and other shifting expenses, that is not the reality for most companies. Instead, most rely on banks for the flexibility they need to make these transitions or to weather the gaps.
A seasoned CFO understands that effective banking practices involve long term strategy and require building a strong relationship with your banker.
Three Keys for Business Owners to Build Strong Banking Relationships
Of course, any relationship is multifaceted, in your personal life or in business. However, there are three key elements that underline any strong business banking relationship:
- Financial Statement Accuracy
- Financial Statement Timeliness
These elements may seem obvious, but unfortunately, not every business owner or CFO makes them a priority.
The first two are inextricably connected: being honest about your past performance, your present needs and your most realistic projections requires the submission of complete and accurate financial information. The third is largely a matter of organization and preparation, two components of good banking and cash flow management practices you will hear me mention again and again.
Together, these three elements build trust with your banker while giving him or her the opportunity to understand your business and its needs so that the institution knows how best to serve you.
Building Strong, Effective Banking Relationships for Business Owners
As mentioned above, being honest, accurate and timely in your dealing with your bank requires organization and advance planning. That means more than just keeping your books up to date, so you can easily demonstrate past performance. It also means considering your plans and projects several months in advance and determining whether you may need assistance with cash flow during that time.
Ask Your Banker for Money Before You Need It
The worst possible time to be shopping for a loan or line of credit is when you are already in serious need of increased cash flow. Some common situations in which businesses go looking for loans and lines of credit that they should have arranged for months in advance include:
- When they are having trouble meeting payroll
- When equipment needs to be upgraded immediately or as soon as possible
- When additional equipment is required to complete a scheduled project
- When additional employees are required to create a scheduled project
- When the company is moving to a new location
- When the company is making a capital investment, such as purchasing the building it will operate out of
When you wait until you are in short-term need of money to make the request, you face several disadvantages:
- You do not have time to properly prepare your information and documentation
- You are not in a strong position to negotiate terms
- You may already be experiencing cash flow issues, making you appear less credit-worthy
Good Planning Makes for Strong Banking Relationships
Occasionally, a surprise cash flow issue arises. However, in a well-run business, you should usually know months in advance when you may be facing significant expenses that are out of the ordinary, or when your revenues are likely to dip, and you may need funds to bridge that gap.
For example, when you are awarded a contract for a new project, you already have a very good idea of what you will need to complete the project–you included that information in the bid. There is no reason to wait until the project starts, or even 30 days beforehand, to make arrangements for any financing you might need. In addition to the concrete advantages associated with planning ahead, you will create a much stronger, more stable impression with the bank if you have a clear plan far in advance and if you approach the banker with your projected needs before you begin to experience cash flow issues.
Cash Flow for Government Contractors
Government contractors often fall into the trap of relying too heavily on the government or prime contractor. Just because you are dealing with someone who can and will pay, does not negate the need to do advanced planning. Starting a new contract often involves needing the cash for payroll and related expenses for 60 to 75 days before getting paid, a fact that is often overlooked by government contractors.
Most banks are flexible when it comes to covering the short term cash flow deficits caused by government contracts, but again, it helps to have that understanding in place well before you need the money.
Good Financial Planning Begins with Financial Experts
Long-term financial planning and cash flow management and good banking relationships go hand in hand. A well-run business with clear advance planning inspires trust in bankers, and a strong banking relationship ensures access to cash when you need it.
Your CFO Solutions provides the expertise businesses like yours need to create projections, develop relationships and provide for your short and long-term financial needs while you oversee your revenues ebb and flow, expand your business, or other changes impact your cash flow.
Contact us today to learn more.