Preparing for “the talk” with the banker
Timothy operates a successful trucking company. His transportation company serves customers across Ontario with a fleet of 25 trucks and 50 trailers. All but 5 of his drivers are on his payroll and he uses the 5 to deliver when all his trucks are fully occupied. Timothy knows that he must keep his vehicles well maintained and he makes sure that he is always replacing the trucks on regular basis to avoid break downs and keep his operations running smoothly. He has made a huge investment in his business but always finds the “talk” with his banker awkward. Every time he replaces a vehicle he must apply for a new loan, and each time the banker always asks about his long-term plans, his growth plans and the financial performance of the business. Timothy sees that many of his competitors are financially challenged but feels he has everything under control. He would like to prepare better for his lenders as he sees himself replacing 5 trucks this year and he doesn’t want to go through the same inquisition every time. Timothy would like to be better prepared for his next meeting as he believes he may be asking for as much as $2.5 million.
Expansion and modernization requires vision and planning to avoid unexpected financial hurdles
Timothy called his accountant who advised him to put together a five-year financial plan that outlined his expected profit performance and the capital investments he would be making to keep his business healthy. To get started he reviewed his past performance and found that he could gauge the health of his business using four key types of ratios: profitability ratios to demonstrate he was earning good money; cash flow ratios to show he was good and managing his collections and payments; leverage ratios to demonstrate that he wasn’t heavily into debt and productivity ratios to demonstrate his operations were running smoothly. In addition, Timothy studied the growth and expansion his business experienced, and the additional growth he might experience going forward. He learned about how to both predict and budget for future revenues and costs. Using this information Timothy assembled a five-year plan that would frame his intentions to the bankers. He demonstrated that with the growth he expected he was going to have the financial capacity to handle the additional investments.
By first reflecting on the financial health of his business, he could identify areas where he could use some improvement and he factored these into his plan so that he could present a sound narrative to a prospective lender. Timothy used the financial plan to also consider different strategies and tactics he needed to implement to achieve his revenue goals and keep his customers happy. His plan was a critical component of his application to his lenders. The plan included more than just a projection of his profit expectations, it showed the impact investments and growth would have on his balance sheet and cash flow for the business. The plan also highlighted that Timothy may need to increase his Line of Credit to ensure that he could grow without any cash flow challenges and obstacles.
