“Your” Banking Crisis
by CFOEd
Numerous financial institutions over the last year have announced huge losses related to write-down of collateralized debt obligations (CDO’s), like those backed by sub-prime loans. Initially, many business managers thought, “No big deal. Good thing I’m not in banking.” But as many companies have found out, they are “in banking.”
Banks provide a major source of funding for all size businesses, from start-ups to the Fortune 500. In banking, $1 of equity is often leveraged in to $12-$15 in loans and investments. Each $1 reduction in bank equity means the bank has many fewer dollars to lend to businesses – something you may have experienced first-hand. Even banks without major write-downs are more closely scrutinizing the risk of their loan portfolio.
The bottom-line? Loans have become more expensive, harder to secure, and when approved, the loan amount is smaller than just a few years ago.
The increased cost and limited access to loans are causing many businesses to grow slower and not invest as much in the future. So, what to do? Here are two strategies that many companies are successfully following.
Hunt for Hidden Value. Increase internally-generated cash flows by better managing business processes. Sound too simplistic or theoretical? Absolutely not. The hunt for hidden value was the theme of a recent CFO Conferences event in Chicago Driving Financial Performance in Tough Times, attended by over 100 very busy, no-nonsense business professionals. A practical first step in this process is comparing your key financial metrics to those in your industry and peers. Want to get started? Use the SmartSamantha Sane-o-Meter to benchmark your business’ performance to the industry. Also, look for the SmartSamantha Bizdom® Hunt for Hidden Value coming soon.
Build a Better Case. Banks may have curtailed lending overall but this does not necessary apply to all businesses. Increase your odds of securing funding by:
1. Providing more defendable forecasts and pro-forma statements;
2. Building better logic into your scenarios about future demand, costs and other key factors; and
3. Knowing how your financial performance compares to the industry and why performance varies – both good and bad (again, check the Sane-o-Meter).
Building a better business case helps lenders make better decisions and more fully understand your business, increasing your chances of getting a loan with favorable terms.
While the current economic climate can be a tough one in which to increase your cash flows or seek funding, having a solid understanding of your own business processes, your industry and your competition can give you the edge you need to weather the storm.