Its about now in Australia that most businesses running a June 30 end of financial year are presenting budgets to their banks for the next year. Here are 5 common mistakes that businesses make when doing this that adversely impact your bankers view of you and your organisation. Make sure you don’t fall into the trap!
1) You don’t mention the bank
The bank wants to know how much its loans will reduce (/increase), how much equity you will retain in the business, how the working capital levels might fluctuate and how much cash you will have. Simply providing the bank with a budget P & L gives very little comfort.
2) Your performance won’t meet your covenants
If your bank is watching your interest cover ratio, for example, make sure you report your expected performance against this and that your performance is expected to meet it. If your business is unlikely to meet the covenants set, then you need to raise this with the bank and proactively seek to have the covenants changed. There is little point for either you or the bank in having unachievable covenants.
3) You will only make money at the end of the year
In banking circles we joke that there is no such thing as a bad forecast – ie no-one ever tells the bank that they are expecting a crappy year. However alarm bells ring when the business only expects to make money and enjoy success in the last 3 months of the year. This highlights that the business hasn’t really worked out how it is going to perform competently.
Your budget is your bank’s way of ensuring that you have a business plan for the year. If you haven’t got a solid and believable plan, you won’t have a solid and reliable bank relationship!
4) Your budget doesn’t give you performance KPIs
Your bank uses your budgeting process as a measure of your financial management competence. A great way to demonstrate this is to take from your budget key performance indicators that you then use to communicate success to the bank with through the course of the year. COGs %, Operating Expense %, EBIT %, Debtor Days, Inventory Days and Creditor Days are all key measures that a bank will take comfort from hearing that you are measuring performance with.
5) You can’t explain how you are going to achieve the numbers set
Your assumptions need to demonstrate how you will achieve the numbers set. If you are budgeting that COGs will drop by 2% this year compared to last year, you need to be explaining how you plan to achieve this. Without this explanation, the bank will undoubtedly change the number back in their own behind the scenes analysis, which will undoubtedly work against you in their assessment.
If you would like us to have a quick look at your budget before you share it with the bank (at no cost) then please shoot it through. We’ll gladly send you through some thoughts on your presentation and identify for you any concerns that your bank might have.
Otherwise here is a checklist that you might find helpful when preparing your budget……. Forecast Checklist