|Posted by Ted Sehl on December 31, 2010 at 12:02 PM|
No one likes surprises – especially your bank. The bank looks to you to provide theirsecurity and a return. To do this, theworld has to unfold as you told them you expected it would unfold. They can accept market changes and will bemuch more patient than you may first assume, but eventually it all comes downto hitting your numbers. If you cannotmeet the projections that you give them, then they begin to lose faith that youreally know where your business is going. It is an issue of control.
So what do you do if your forecast has to be fairlyoptimistic to hit the financial covenants that you have in place? First start by listing all your assumptionsand then key in on the actions you have to take to insure that theyhappen. If you need to land a big customer,who is leading that charge? How are you monitoring the progress? Do you have any other prospects in the salesfunnel that you can accelerate should this initiative fail?
Next, assume the worse. Recast your numbers and determine how far you are away from compliancewith the covenants. What can you do tomeet them? Do you need to inject extracash? Accelerate receivable terms? Negotiate more favourable terms with suppliers? Make overhead reductions? Quantify each alternative and determine whenit gets you back into compliance.
Your ultimate goal is to be able to provide the bank a forecastwith a list of assumptions so that they know what you are counting on, and thena list of remedial actions that you can make happen if you do not hit yournumbers. You want your banker to be ableto sleep nights. You may enjoy the goodnights sleep also.