Monday, August 22, 2011

Impress or Scare Your Banker

Let's pretend you're the banker and you're scheduled to meet with two different companies, back-to-back. You get to decide which one you should loan money to. The CEO of both businesses will be male to ensure your judgment is gender neutral. Here we go:

The CEO walks in wearing casual clothes, has a dark tan, and appears more like a beach bum than a business owner. He struggles to articulate why he needs a loan and has failed to come with the documents requested. His bookkeeping is handled by his daughter who also serves as PTA President and has five children, among other civic and church priorities, he explains, and she didn't have time to get everything together as requested. You recall sending the request three weeks earlier and wonder if they'll ever be able to produce the tax returns, financial statements, and corporate documents requests. The CEO spends a lot of time talking about how great his business is and how amazing the potential for his business will be, painting a picture of the next Google just one loan away from going huge. When you probe, he cannot articulate the key driving metrics of his business, like lifetime value of a customer, cost per customer acquisition, and other efficiency and financial ratios.

The CEO walks in wearing work clothes and it is apparent he's been working in a manufacturing facility. He explains how he spends one day per quarter working on the production line with his rank and file employees to stay close to them and his operations. He humbly approaches you with an organized binder, assembled by his well-trained and properly educated accountant. He speaks directly about his business, his passion for his customers, and he displays a strong knowledge of why his customers buy his products and what motivates their purchasing decisions. You can sense he's not making assumptions, but he knows his target market intimately. You open the binder to find labeled tabs for each separate document requested, and you turn to the first tab called Summary Metrics. The page is covered with charts and graphs demonstrating that this business owner knows what makes his business tick and what drives his cash flow. He even points to the bottom to something called a Fixed Charge Coverage Ratio, also referred to as the One Ratio No One Talks About--Except Your Banker. He explains that his financial consultant has taught him that bankers use this ratio to evaluate his ability to pay back the loan he is seeking.

After thorough analysis (once Company A finally produces the information you requested, although you see some warning signs that they may not be accurate), you find both businesses appear on paper to be the same level of risk. Quantifiable information says you can make the loan to either one with the same likelihood for being repaid. But your bank's lending limits will only allow you to lend to one. So which do you choose?

Every banker I know would pick Company B. They see a business owner without ego, willing to do whatever it takes to make his business successful. He knows his customers and runs his business by the numbers prepared by someone who treats the timely and accurate bookkeeping and accounting functions a top priority. So, which CEO are you?