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Every business owner wants to develop and maintain a strong relationship with their banker. You want your banker to understand your business, to structure your accounts so they are most beneficial to your operation, to offer reliable advice when you need it, and to help you navigate the loan process when you’re seeking extra cash to expand  or purchase new equipment.

Sometimes, however, relationships with banks turn sour. In this edition’s main article, Chris Todd examines why relationships can deteriorate and offers practical suggestions for coping with these situations.

A sampling of some of our more notable recent assignments is also included in this newsletter.

I also invite you to take a look at our redesigned website, www.beaneassociates.com, which offers a fresh presentation of what we do and how we do it. I have also begun blogging, and you can access recent blog posts, and back editions of all our newsletters, from the website.

As always, we welcome your comments and encourage you to forward this newsletter to anyone you think would find it interesting.

Sincerely,
Tom Beane, President CMC CIRA

Millard D. Brown II, managing director of our Atlanta office, has been named program chair for the Atlanta chapter of the Institute of Management Consultants USA. He is responsible for scheduling the chapter’s events and speakers. Brown, a Certified Management Consultant and member of the Turnaround Management Association, has more than 30 years’ experience developing and implementing crisis and change management for public and private companies. He is a resident of Alpharetta, Ga.

Christopher H. Todd has been appointed to the Cooperation with the Bar and Other Professionals Committee of the Pennsylvania Institute of Certified Public Accountants. The committee aims to expand relationships between CPA’s and attorneys and other professionals while building strong, open communication channels with state and local professional associations by sponsoring conferences and seminars. Todd, a CPA and a Certified Fraud Examiner, has 20 years of experience as an accountant and crisis management consultant.

Beane Associates, Inc. sponsored The Outlook, the first in the Philadelphia Turnaround Management Association’s new educational Snapshot Series. The program, held Feb. 8 at the Philadelphia Academy of Music, featured a discussion of the economy by Dr. Mark M. Zandi, chief economist of Moody’s Analytics and an influential source of economic analysis for businesses, journalists and the public.

When your business is doing well, and the rest of the economy is rolling smoothly, it’s easy for your banker to be your best friend. In that ideal world, cash flow is positive, revenue meets or beats projections and financing your planned expansion is no problem at all.

For the last four years, however, the economy has been sagging, businesses have been staggering, and friendship is a word that has disappeared from your banker’s vocabulary. Businesses that have had prolonged, stable and mutually satisfying relationships with their banks can no longer take those relationships for granted.

What’s going on?

Make no mistake about it, the tightened regulations introduced following the 2008 meltdown have banks paying closer attention to all their accounts— not only to avoid running afoul of regulators but also to make sure that their overall loan portfolios maximize both safety and profit.

In this environment, it’s not enough for your business to make all its payments on time. Your bank will be looking for additional metrics that show that your company is positioned to sustain its profitability. If doubt creeps in, your company could be headed for a meeting with the bank’s workout department.

As turnaround specialists, we often get the call to work with businesses that are caught completely off guard when their banking relationship changes. Many times, the business is struggling in the slow economy, sees its revenues decline and figures that it’s just a bump in the road, a situation the CEO figures his bank ought to tolerate because they haven’t missed a payment yet.

But banks see things differently. To the bank, that decline means that a greater percentage of its money is at risk, and, if your situation doesn’t improve, the odds that you won’t make payments on time, or won’t make payments at all, become greater.

Sometimes banks will alter their relationship with a business for reasons that aren’t necessarily related to a company’s financial condition. For example, six years ago we were called in to work with a business that manufactured parts that were eventually sold to a large auto manufacturer. The company’s bank, concerned with the manufacturer’s declining profitability at the time, concluded that its portfolio had too much exposure to second-tier and third-tier suppliers in the automotive industry. If  troubles in the auto industry continued, the bank reasoned, ultimately these suppliers would see their orders shrink and they might go out of business. So, the bank embarked on an effort to shed some of those suppliers.

Regardless of the reasons for winding up in workout, your business will have to deal with the reality, and you will have to make changes. The workout officer will assess your credit, analyze your management team, review your financial trends and draw his own conclusions about your financial condition. The bank may reduce your credit line or increase your interest rate. If the bank thinks your problems are severe, it may recommend that you choose from a list of consultants — specialists like Beane Associates — to work with you to straighten out your operation.

For most business owners, none of this sounds appealing. But it’s not the end of the world. Your objective at this point should be to work with your bank and consultant to come up with a plan to reorient your business. You and your consultant will have about 45 days to draw up your plan. Your objective is to show the bank that, at the end of your projection period (typically thirteen weeks but sometimes as long as six months), the bank will be no worse off, and hopefully somewhat better off, than it is at the start of your projection period.

In the short term, you will have to tighten up — most likely starting by making payments to lower your outstanding balances. You will have to give the bank comprehensive and accurate reports on the steps you are taking. The bank will want to see that you are reducing expenses and accelerating collections. You may have to streamline procedures and eliminate less profitable components of your business.

It is inevitable that stresses will develop as you work out these issues with your bank. Even if your plan is successful and your business emerges in a stronger position than it was before, you may feel that the relationship with your bank will never be the same. Keep in mind, too, that the bank may be feeling the same way about your business. When a bank develops a case of “lender fatigue,” it may begin delivering messages, subtle at first, that it wants to show you the door.

In these circumstances, it often makes sense to look into establishing a new relationship with another bank. No two banks are exactly the same, so you may be a better fit with another lender. Keep in mind, too, that the economic recovery we’re all hoping for is still in low gear, so banks that are looking to build their portfolios are doing so by latching on to their competitors’ accounts.

So, if your business is headed into workout, don’t panic. If you heed your consultant’s advice and communicate openly with your bank, workout can work out to your benefit.

What to do if your banking relationship is headed downhill:

• Resist the urge to be resistant. You may not be happy with the situation but working with your banker is your only alternative. Failure to cooperate will hurt your business even more.
• Streamline. Be ready to make tough decisions. Cut back or eliminate unprofitable sectors of your business. Narrow your focus and concentrate on your profit centers.
• Payback is good business. Start paying down the principal on any loans and credit lines. If you can reduce the risk the bank is taking in your business, you have a better chance of remaining a customer.
• Shop around. There may be another bank that better meets your needs. See if you can find one.
• Choose a turnaround consultant from the list your bank provides. Time is of the essence, and consultants who know how your bank works will get this difficult work off to a good start.

Situation: When a private equity group could not get timely, accurate and relevant financial information from a portfolio company, it asked Beane Associates, Inc. to determine why.

Result: We determined that the company staffed key positions with underqualified personnel. This stunted the company’s reporting capability, undermining any solution a software application could provide. We laid out a tiered framework for ownership that acknowledged cost constraints but still addressed information needs of decision-makers.

Situation: The economic downturn and serious personal problems left the owner of a veterinary clinic that specializes in caring for cats on the verge of shutting down.

Result: The veterinarian, a skilled surgeon who lacked strong business acumen, contacted Beane Associates Inc. for advice on how to keep the clinic going. We helped negotiate reductions in rent and loan payments and coached the owner on how to save the clinic. We kept all employees informed of the possible outcomes and helped the owner implement a survival plan.

Situation: The secured creditor had a credit facility outstanding to a highly leveraged company with solid municipal and federal contracts but never enough cash. Bounced checks, little credit availability under an ABL note, massive operating losses and overly optimistic sales projections characterized this borrower. Beane Associates, Inc. was asked to review the projections for feasibility and make recommendations where necessary.

Result: We utilized our structured diagnostic tools to identify weaknesses within the accounting department associated with the cash shortfall. We also identified deficiencies in cost accounting and financial reporting and proposed implementing a variety of sales management tools. Heeding our advice, the lender decided not to rely upon management’s financial projections and instead entered into a short-term arrangement that mandated reporting information on a more timely basis, with an emphasis on the immediate future, to avoid working capital emergencies.