Linda Keith CPA

Five high-level bankers speak up on availability of small business credit

2010-09-16T20:54:20Z

To prepare for a CNN interview on the 'freeing up' of small business lending, I had a very interesting discussion with:

•   Director of SBA Special Assets with a national $282 Billion Bank
•   CEO of a one branch local business bank in Washington
•   CLO of a $8.6 Billion State-wide CU in Washington State
•   Chief Risk Officer of a family-owned 17-branch bank in Oklahoma
•    30+ year business banker with a regional $ bank in Washington State

Federal Reserve Chairman Ben Bernanke had just come out with his speech (another one) about what it will take to improve availability of credit to small businesses in America.

Synopsis:

Economy is better but is not good.

There is a lack of demand for good quality business loans.

Some loans they might have done themselves get done through SBA loans instead.

Underwriting standards may be a bit tighter, but in many cases the loan requests do not even meet the pre-recession standards. Many small and medium-size businesses have not recovered to the point that they are again credit-worthy...yet.

Examiners come into play in three ways:

1) What was well-capitalized may not be enough to satisfy examiners.
They want higher which may constrain a banks growth if they cannot raise capital. Also, banks even who are well-capitalized cannot take a chance of a bad mistake. Too costly. Thus more conservative.

2) Still want a shift to C&I from CRE. I heard from one bank CEO some regulators are also more concerned about owner-occupied CRE, not just non-owner occupied. Banks that are conservative have seen a difference...owner-occupied considered safer.

3) Emphasis, rightly so, on good credit analysis including tax returns and financial statements. If a lender is confident in a business loan but the recent numbers are not up to snuff, the lender may have less latitude in making that loan.

The impression as to whether Examiners are too restricting or not varied among the business lenders I spoke with.

The end result...the high-level regulators and the politicians say easing credit to small businesses is a key to our recovery. But the regulators visiting the banks are still very cautious and conservative.

Business bankers all said:

Credit analysis skills are more important than ever.

Understanding of business fundamentals, the ability to ask probing questions about recent and projected performance, and the ability to clearly articulate the results in a loan write-up, to loan committee and ultimately to regulators is key.

A banker from a family-owned bank said that the small banks in rural America may not make it. There will be consolidation.

The Credit Union Advantage? De Novo?

The Credit Unions may have an advantage in that many have few loans on the books to go bad but are able to capitalize on an existing relationship. Actually, the same can be said for De Novo banks.

Is it better than last December?

CNN's Colin Barr and I talked last December. Heasked about the general sense of things in comparison to our last conversation.

I said I get the impression that business lenders feel things are improving, but there is a long way to go. There is more interest and activity, but it has not turned into enough doable loans...yet. The bank CEO said it is like we had pneumonia...and now there is a bad, lingering cough. The cough is better than pneumonia but...

Colin asked if the sort of euphoria at the beginning of the year that we had turned the corner has had an impact on business lending. I told him...

There is a series of things that have to happen:

A small business owner has to have confidence that the euphoria or improved consumer/business confidence will turn into increased demand for their goods or services
The small business owner has to translate that into projections s/he is confident in
The small business owner then has to come up with a plan and consider whether they have sufficient liquidity, capital or access to funds to carry it out
The small business owner has to articulate that plan to a business lender with enough information that the lender has confidence in the outcome
If recent operational history has been challenged, the business owner has to overcome low DCR or loan-to-value assumptions with compelling mitigating factors
If convinced, the lender has to articulate all of those things through the written write-up and presentation to loan committee (if it is over his/her lending authority)
Ultimately, if the loan is made, the regulators will scrutinize the decision

It is getting better...but is still painful.

Business lenders in many cases have a long-standing relationship with their borrowers. They would make the loans if they could sufficiently mitigate the risk and pass scrutiny. Not only are they in 'business' to lend money, they also have a commitment to their customers and their community. Thousands and thousands of minds are working hard on this problem at every level.<

Do you agree?

Or do you have a different take on what it will take?

Financial Statement Analysis: How to "Read" a Ratio

2010-09-09T20:02:29Z

Nobody reads financial statements, we interpret them. So how do you interpret this statement?

"Current ratio is 1 point 8 4 to 1."

1. As written, it would look like 1.84:1
2. It means there is 1.84 of whatever is in the numerator compared to what is in the denominator.
3. You have to know more.

A ratio in isolation is meaningless. Really!

What if you algebra is not your first language?

The numerator is what is on top, the denominator is what is on the bottom.

Here is an example:

Current Ratio = Current Assets (numerator: what is on top)
Current Liabilities (denominator: what is on the bottom)

If the current ratio is 1.84:1, this means there is $1.84 of current assets for every dollar of current liabilities. This is why I like to express ratios to two decimal points. If you are relatively new to financial statement analysis and it is expressed as 1.8:1, it is not as obvious that it is $1.80 of current assets for every $1 of current liabilities.

But we are not done yet!

Again, if you are newer to this, you may not have a gut feel (or even a clue) what current assets and current liabilities mean. If that is true, you need to restate this with the definitions.

First, let's restate this. For every dollar of {current liabilities} the company had $1.84 of {current assets}.

Now replace the {terms in brackets} with {their definitions}.

Here you go:
For every dollar of {principal due in the next twelve months}, the company had $1.84 of {cash and thing they expect to turn into cash within the next twelve month}.

So what?

Well, I don't know. And neither do you, yet. But if you know that the company had $1.30 in current assets for every dollar of current liabilities in the prior period, you know that liquidity is improving.

And if you know that a company of this type and size generally has a current ratio of 2.30:1, you know that the company is still less liquid than similar companies. Now you could ask more questions to understand why...and whether that is a concern.

You need to know

What two items the ratio compares
The definition of those two items.
What the definition really means
What the trend is in the company
How the ratio compares to other similar companies

I know the pronunciation rules for Spanish and for Russian. I can pronounce a word in either of those languages. Doesn't mean I know what it means.

If you can read a ratio out loud but you do not know everything in my 'need to know' list above, then you are not interpreting the financial statements. And if not, then you cannot make good decisions based on the ratios.

More at Lender's Online Training

Learn how to analyze and interpret financial statements if you need to understand the business. I have just finished the eCourse on 'Intermediate Financial Statement Analysis: Liquidity' for my site www.LendersOnlineTraining.com. It covers how to read a ratio, the three most commonly used indicators of liquidity, where to get industry averages and whether they are a good fit.

This is one of the eCourses that requires a subscription so if you are not already signed up...do it now. Here is the rest of the eCourse list.

Intermediate Financial Statement Analysis: Intro is complimentary and so are several other eCourses. Decide if it is time to go back to school, up your game and learn how to go beyond 'reading' to 'understanding'.

An opportunity to go the extra mile for your business borrowers...

2010-09-02T17:21:06Z

In a recent post, one of the differentiating factors of a bank or credit union that will be more competitive as the competition heats up is one that can 'teach and advise' business borrowers.

Banks and credit unions wanting a market advantage look for ways to add value for their business customers.

I can help with that.

Email me about offering a presentation for you business customers. You have two to choose from:

PLAN to Capsize: How to Prepare for Setbacks to Recovery Quickly and Get Everyone Back in the Boat I apply lessons learned kayaking in the coldest summertime waters of the U.S. to business success. I even wear my Maraschino Red Paddle Jacket and bring my bright yellow paddle.

Calm Seas or Rough Waters: The Ten Essentials for Success at Work Your clients can identify and start to work on the essentials they need to succeed in their business.

These are fun, interesting, thought-provoking, practical and will show your business clients you are working for them.

Can Your Bank Do This? Learning from the past...

2010-08-28T16:57:37Z

One of the interesting things about the internet is that whatever is written stays out there for a very long time...forever? This morning I ran across an Inc. Magazine Online article from 1996 suggesting that small businesses should be shopping around if their bank does not meet some criteria.

And as is often the case, the word 'bank' could be replaced with 'credit union' if you are offering member business lending.

A Borrower's Market for Small Business

Before I share it with you, let me suggest that at least for small businesses who are in a strong credit position, it is definitely a borrower's market...again. So here is your borrower's checklist:

Does my financial institution see me through adversity?
Does it save me time?
Does it treat me as an individual?
Does it teach and advise?
Does it do something special for me?
Does it accept responsibility for me?
Does it let me borrow against the future?
Does it find customers for me?

Back to the Future?

I am not suggesting that we are in the same boat now as we were in 1996. But cycles are cycles. Is your bank or credit union positioned to come out on top when the borrower's start asking these questions again? Read the entire article for specific stories that illustrate each of the points.

What are you doing to increase your competitive edge?

Okay, you probably won't answer that here because your competitors read this blog, too. But think about it!

What business lenders can learn from ag lenders: Replacement of Assets

2010-08-24T14:27:57Z

Last week I had the pleasure of spending two quality days with Greenstone Farm Credit Services in Michigan and Badgerland Farm Credit Services in Wisconsin. By the end of our two-day tax return analysis training, one of the lenders said:

"I never thought I'd say this about tax returns, but I'll spend two days with you learning about tax return analysis any time!"

Replacement of Assets: An Ag Lenders approach

Like their colleagues at Northwest Farm Credit Services (where I have done this ag focused training for 13 years and counting), the ag lenders pay a lot of attention to whether a farming operation is replacing the assets critical to their success on a reasonable basis.

Here is one way to do it:

First enter into your system the depreciation per the tax return as a rough estimate of how much has been 'used up'. The term for this is 'Use Cost'.
Next adjust that number.
- This may be to depreciation per books and records which is not distorted by Section 179 first-year write-off, for example.
- Or you may have a formula that makes sense for the type of operation...dairy, cattle, crops or orchards.
- Another factor is the stage the operation is in. Is it still ramping up? Is it established?
Finally, compare the adjusted 'Use Cost' to the capital purchases. If the purchase is financed, you may compare to the down payment plus principal payments on capital purchase loans. This helps spot if a farming operation has some catch-up to do in order to stay on course.

Understanding where they are in replacement of capital assets, ahead or behind, is an important factor in making a good loan decision on whatever the request is now.

Business lending application

A business lender can review the equipment list. Some tax software includes this even though not required. But sometimes you'll need to get it from borrower records.

Then consider:

Does the equipment list make sense for what I think the business does?
Are there major changes that might indicate a change in focus?
Have they replaced equipment on a similar pace to their historical usage?
If not, why not?
Do they need to play catch-up?
How does that impact the loan decision I am making now?

How about you?

How do you take into account capital replacement needs? Do you have any formulas or expectations for different kinds of businesses?

Rampant non-reporting of income: What's a lender to do?

2010-08-19T14:13:54Z

"Up to 30 percent of workers who are not issued either W-2s or 1099s do not report either all or a portion of their income."

This from Accounting Today in an article by George G Jones and Mark A Luscombe about the new requirements to file 1099's for goods as well as services. (That is going to be a nightmare for your small business borrowers!)

So what do you do when a prospective borrower says:
"Here is my tax return but let me tell you what I really make..."

Consumer and Mortgage Lenders

In my experience, consumer and mortgage lenders often take a cut-and-dried approach. "If it is not on the tax return I won't be able to use it. Let's see what we can do with the income you reported."

Notice that if they can qualify them with what is reported, they are doing it even when the prospective borrower has come right out and said the lie to third parties for financial gain. I am not judging at all, here. Just be sure you are following your guidelines and for heaven's sake, check everything. If they lie to the IRS they are more likely to lie to you.

Business Lenders

Business loans are often bigger. The collateral may be less marketable than a house or a car. (Notice I said 'may be'.) The relationship often is more ongoing. If a business lender thinks a prospective borrower cheats on their tax return in any significant way, I recommend they find a way to say 'no'. Go find borrowers you can trust.

Maybe you misunderstood...

There are many very legitimate reasons for what appears to be under-reporting of income. Some income is not taxed, like minister's housing allowance and child support. Other income is not yet reported on the tax return because it is cash-basis. Perhaps the work was done but the tax return does not yet show the income.

So when the borrower says: "Here is my tax return but let me tell you what I really make..." hear them out before you assume they are cheating.

Looking for add-backs in all the 'right' places!

2010-08-13T01:55:14Z

I can tell it is getting harder to make loans. I am getting more questions through the 'Ask Linda' section of my website on unusual items the lenders want to add back.

The most recent...intangible drilling costs and accretion expense. I'll be posting those questions (and answers) to the 'Ask Linda' archives soon.

The short answer, intangible drilling costs are real and accretion expense is non-cash...but is evidence of a major cost coming up.

The point...as you work harder to find adjustments to get from taxable income to recurring cashflow, look at those items that you have never understood and ask yourself if you have been missing something.

Then come to my website and use the 'Site-wide search' at the bottom of every page. Who would have known I might write about intangible drilling costs? Or accretion expenses?

(Heck...now I have to get the answer up on the site!)

And why will I write about them? Gee, why do I even know as much as I do about them? Because someone just like you searched my site and, upon not finding the answer, asked. I'll answer. And if I don't know ...I'll do my best to find out.

What is your question?

BTW...the Texas bankers have been asking the most interesting questions lately. I met a bull up close and personal at my Granddaddy's dairy farm outside of Hillsboro Texas when I was 8 years old. I guess the Texas bankers appreciate that I recognize 'bull' when I see it! '-)

Small Business Owners: Delusional or Optimistic?

2010-08-05T18:39:45Z

Check out the 2010 U.S. Bank Small Business Annual Survey

Here is what leaped out for me:

89% believe we are still in a recession
75% believe we will be in a recession next year

And yet:

63% say their company is financially healthy
50% say they allocate plenty of time for friends and family

Here is US Bank's take-away:

Small business owners uniformly agree the U.S. economy is in a recession, but have mixed views on the business conditions in their local markets.

Despite the current economic climate, most remain confident in their own company's ability to weather the storm.

They are proven survivors when it comes to persevering through business challenges and downturns.

They can be defined by their work ethic and ability to solve problems, which supersedes the importance of strategy, creativity, and risk-taking.

They are always on the go. Maintaining flexibility, finding the right work/life balance, and giving back to the community are top priorities.

They would like their bank to adjust to meet their individual needs and get to know them and their business better.

Read the report to get the full scoop, compare your region to the national results, and consider how this impacts how you approach your small business borrowers.

Five (more) reasons a business might not be credit-worthy

2010-07-26T19:15:11Z

I have known John Martinka for years. He is a founder and vice-president of "Partner" On-Call Network a nationwide group of consultants. His focus is working with business owners who want to (eventually) sell their business. From a valuation point of view, he lists five reasons the business may not be what the owner hopes it is. My first thought when I read the list was that these are also five reasons you, the lender, might have concerns about a business loan.

Here are the five:

Dependency on owner
Customer concentration
Financial statements and tax returns differ (see my note below)
Dependency on a key employee
Poor lease or no lease available

About differences between financial statements and tax returns

As a lender, you need to know the legitimate reasons the financial statements and tax returns will differ:

Cash basis versus accrual basis
COGS rules
Inventory rules
Depreciation rules
Calendar year versus fiscal year

Good list, though. Read his full post here.

What would you add?

Can you or can't you use Capital Gains as recurring cashflow to qualify your borrower for a loan?

2010-07-21T01:14:57Z

Once again, I sense you are looking for a definitive answer. And it is....(wait for it)...it depends.

When it makes sense to use Capital Gains as recurring cashflow:

The borrower is receiving payments on an installment sale.

This is reported on the Form 6252 and then comes through Schedule D (or perhaps Form 4797) on it's way to the front page of the 1040 if this is a personal return.
On page one it may look like any other Capital Gain and you may mistakenly ignore it.
Find out how much the borrower is receiving and for how much longer. Then decide.

The borrower has more than several years of consistent cashflow from capital gains

Typically this will be either someone who is retired, who is independently wealthy or who is a developer/real estate investor.
You will not be able to tell from the Schedule D what their cashflow actually is. Require a broker's statement for stock transactions and the closing statement for real estate.
Remember, the tax return only shows what was sold. If you want the entire picture, consider buys and sells

When it doesn't make sense to use Capital Gains as recurring cashflow:

The borrower only shows capital gains periodically.
The borrower shows no capital gains in the most recent year or years.
Your guidelines just don't let you do it!

I have a problem with a hard and fast rule that you can't use Capital Gains. What if you have a retired borrower who was very conservative and well-diversified. They already have recovered many of the losses they might have suffered during the recession.

Yes, we are lending on asset conversion instead of new income. But if a retired person did it right, heck, they are living on asset conversion. That is what drawing from pensions and IRAs - and selling down their portfolio - is.

CNN Calling! Reporter wants to know...

2010-07-13T14:05:16Z

In his July 12th speech regarding Restoring the Flow of Credit to Small Businesses, Federal Reserve Chairman Ben Bernanke said:

We have heard the often-expressed concern that bank examiners have prevented banks from making good loans. We take this issue very seriously. The Federal Reserve has worked assiduously with the other banking regulators to develop inter-agency policy statements on this issue, aimed at both banks and examiners. Our message is clear: Consistent with maintaining appropriately prudent standards, lenders should do all they can to meet the needs of creditworthy borrowers.⁶

Doing so is good for the borrower, good for the lender, and good for our economy. To ensure that this message is being heard and acted upon, we have conducted extensive training programs for our bank examiners as well as outreach with bankers, and we will continue to seek feedback from bankers and borrowers.

CNN Reporter Colin Barr contacted me to ask what my business banking contacts are finding in terms of loans to small business. I called five of you but would like to hear from more.

Here are my questions. Answer any or all. Add your own.

What is happening with loan volume to small- and mid-size business?
Are the stronger businesses still holding back in requesting loans? Why?
Are your underwriting standards tighter than pre-recession?
If so, is that a good thing?
Are the small- and mid-size business loan requests you are turning down because the borrower cannot even meet the pre-recession underwriting guidelines, not to mention your current guidelines?
Is the main deterrent to small business lending the continued weak economy resulting in (still) depressed revenues for these businesses?
Does your bank have money to lend to small businesses?
Are the Examiners being reasonably prudent?
Do you feel that if you find a good loan, can understand and explain the deal, but the recent numbers do not meet cashflow or DCR requirements because of a down 2008 (let's assume 2009 improved and 2010 is looking good)...could you get it approved? Would it pass muster with the Examiners?

What will it take to restore the flow of credit to small businesses?

What does it all mean? Glossary of Bank Risk and Failure terms...

2010-06-29T15:27:28Z

Are you having any trouble at all keeping up with all the terms and acronyms related to bank challenges and failures? Is it hard to be that knowledgeable banker at the cocktail party or the business meeting when you stumble over terms and acronyms?

Here is the glossary of terms and the acronym list from the Material Loss Review Report on 'my' failed bank. I was a shareholder in the 92nd bank to fail and found the 43 page report interesting reading. Okay, I didn't read it, I skimmed it.

Adversely Classified Assets
Assets subject to criticism and/or comment in an examination report. Adversely classified assets are allocated on the basis of risk (lowest to highest) into three categories:

Substandard
Doubtful
Loss

Allowance for Loan and Lease Losses (ALLL)
Federally insured depository institutions must maintain an ALLL that is adequate to absorb the estimated loan losses associated with the loan and lease portfolio (including all binding commitments to lend). To the extent not provided for in a separate liability account, the ALLL should also be sufficient to absorb estimated loan losses associated with offbalance sheet loan instruments such as standby letters of credit.

Call Report Consolidated Reports of Condition and Income
Also known as the Call Reports, these are reports that are required to be filed by every national bank, state member bank, and insured nonmember bank pursuant to the Federal Deposit Insurance Act. These reports are used to calculate deposit insurance assessments and monitor the condition, performance, and risk profile of individual banks and the banking industry.

Cease and Desist Order (C&D)
A formal enforcement action issued by financial institution regulators to a bank or affiliated party to stop an unsafe or unsound practice or violation. A C&D may be terminated when the bank's condition has significantly improved and the action is no longer needed or the bank has materially complied with its terms.

Collateralized Debt Obligation (CDO)
CDOs are a type of structured asset-backed security (ABS) whose value and payments are derived from a portfolio of fixed-income underlying assets. CDO securities are split into different risk classes, or tranches, whereby "senior" tranches are considered the safest securities. Interest and principal payments are made in order of seniority, so that junior tranches offer higher coupon payments (and interest rates) or lower prices to compensate for additional default risk.

Collateralized Mortgage Obligation (CMO)
CMOs are created when individual mortgage loans are packaged or pooled by issuers and offered to sale to investors. There are two types of issuers - agency and private label. Agency-issued mortgage-backed securities meet specific underwriting criteria whereas private label issues generally comprise nonconforming loans.

Concentration
A concentration is a significantly large volume of economically related assets that an institution has advanced or committed to a certain industry, person, entity, or affiliated group. These assets may, in the aggregate, present a substantial risk to the safety and soundness of the institution.

Investment Grade
Investment grade generally means a security that is rated in one of the four highest rating categories by two or more nationally recognized statistical rating organizations.

Other Than Temporary Impairment (OTTI)
An impairment of a debt instrument occurs when the fair value of the security is less than its amortized cost basis. According to accounting standards, when the impairment is judged to be other than temporary, the cost basis of the individual security must be written down to fair value, thereby establishing a new cost basis for the security and the amount of the write-down must be included in earnings as a realized loss.

Prompt Corrective Action (PCA)
The purpose of PCA is to resolve the problems of insured depository institutions at the least possible long-term cost to the DIF. Part 325 of the FDIC Rules and Regulations, 12 Code of Federal Regulations, section 325.101, et seq, implements section 38, Prompt Corrective Action, of the FDI Act, 12 United States Code section 1831o, by establishing a framework for taking prompt corrective supervisory actions against insured nonmember banks that are less than adequately capitalized. The following terms are used to describe capital adequacy:

Well Capitalized
Adequately Capitalized
Undercapitalized
Significantly Undercapitalized
Critically Undercapitalized.

Tranches
Multiple classes of equity and debt that are set in a senior or subordinate position to one another based upon seniority in bankruptcy and timing of repayment. The tranches are divided into three general categories:

Senior tranche
Mezzanine tranche
Equity tranche

Uniform Bank Performance Report (UBPR)
The UBPR is an analysis of financial institution financial data and ratios that includes extensive comparisons to peer group performance. The report is produced by the Federal Financial Institutions Examination Council for the use of banking supervisors, bankers, and the general public and is produced quarterly from Call Report data submitted by banks.

Acronyms:
ADC Acquisition, Development, and Construction
ALLL Allowance for Loan and Lease Losses
ARD Assistant Regional Director
BOLI Bank-Owned Life Insurance
BSA Bank Secrecy Act
C&D Cease and Desist Order
CAMELS Capital, Asset Quality, Management, Earnings, Liquidity, and Sensitivity to Market Risk
CD Certificate of Deposit
CDO Collateralized Debt Obligation
CMO Collateralized Mortgage Obligation
CRE Commercial Real Estate
DIF Deposit Insurance Fund
DRR Division of Resolutions and Receiverships
DSC Division of Supervision and Consumer Protection
EIC Examiner-in-Charge
FDI Federal Deposit Insurance
FHLB Federal Home Loan Bank
FHLMC Freddie Mac - Federal Home Loan Mortgage Corp
FIL Financial Institution Letter
FNMA Fannie Mae - Federal National Mortgage Association
GAGAS Generally Accepted Government Auditing Standards
GSE Government Sponsored Enterprise
LTV Loan to Value
OIG Office of Inspector General
ORL Off-site Review List
OTTI Other Than Temporary Impairment
PCA Prompt Corrective Action
RO Regional Office
ROE Report of Examination
SEC Securities and Exchange Commission
UBPR Uniform Bank Performance Report
UFIRS Uniform Financial Institutions Rating System

Got that? No, there won't be a quiz!

Do you have any to add to the list?

How your business borrower can manage cash flow better...

2010-06-25T14:25:01Z

Toolbox for Finance offers this article by SAP: Managing Cash Flow in Times of Crisis.

It is a good article to read if you have business borrower's challenged by cash flow...and I am guessing that most of your business borrowers are. In tough times, improving the management of the company cash cycle is a priority.

When a business lender understands 'best practices' in managing company cash flow you can be a better resource for ideas and, through your conversation with the borrower, better assess if they are doing everything they can to protect their cash flow.

Here are a few of SAP's tips for improving the credit-to-cash cycle with my thoughts added:

Add an up-front credit evaluation.

Linda's thoughts: Pre-recession a company may have checked credit before they offered terms to a new customer. Now for major customers, checking credit before each major sale may be necessary.

Do not rely on a single before-sale evaluation.

Linda's thoughts: Besides an external credit check periodically, monitor all major accounts for signs of trouble. Put a 'Google alert' with the customer name to stay on top of major news. Keep in touch.

Monitor outstanding accounts receivable closely to drive timely collections and ensure low DSO (Days Sales Outstanding).

Linda's thoughts: Consider a phone call the day after the bill is due. Instead of asking for their payment, check in on the quality of your service or what else you might do for them. Then ask about the bill. Chances are they may bring it up before you do.

Conduct careful receivable aging analysis.

Linda's thoughts: This will help in two ways. It will provide the early warning sign that collections efforts may need to be improved. And it will alert management that alternate cash flow sources may need to be found before the problem gets worse.

Systematically pursue follow-up collections on overdue accounts.

Linda's thoughts: Especially for smaller businesses, this can be haphazard. As the lender, consider finding some good resources for information on this (the SBA for example) and offer it to all of your business customers.

I would add:

Depending on how severe the cashflow issue is, consider running a 13 week cashflow forecast and updating it weekly
Review the concentration risk of relying on one major customer. Take action to diversify the client base to reduce the chance that one bad debt could take the business down.

What are your suggestions for managing the cash flow the company already has coming to them?

NEW Complimentary eCourse on Balance Sheet Basics!

2010-06-17T20:31:18Z

We are adding the section on Financial Statement Analysis to Lender's Online Training with a complimentary eCourse on Balance Sheet Basics.

This joins 4 eCourses on General Analysis Topics, 15 on Tax Return Analysis and two additional on lending.

Here is the list. Those with a gold star are complimentary.

Analysis: Financial Statements

Balance Sheet Basics (25:39 minutes)

Three characteristics of the Balance Sheet

The difference between personal and business balance sheets

Three types of 'value' and which the balance sheet tells you

Complete a basic Balance Sheet

Balance Sheet Terminology

Income Statement Basics (16:05 minutes)

How the Income Statement and Balance Sheet fit together

The income statement equation

Terminology...which gross is gross?

How to increase profits

In progress, Statement of Cash Flows Basics, Trends and Ratios, CPA Prepared Statements.

Analysis: General Topics
These topics apply to both tax return and financial statement analysis.

Types of Business Entities (22:58 minutes)

Cash versus Accrual Basis (16:20 minutes)

Debt, Debt Ratios and Debt Shortcuts (15:47 minutes)

Depreciation in Financial Statements and Tax Returns (17:10 minutes)

Analysis of Tax Returns
The topics in this first group apply to 1040, 1065, 1120 and/or 1120S tax returns.

Green Legos, Six Ns and a Map to Tax Return Analysis (16:03 minutes)

Capital Gains and Losses...Basics: Schedule D and Form 4797 (17:19 minutes)

1040 Personal Tax Return

1040 AGI vs Schedule Analysis Method (07:11 minutes)

1040 C 1) Basics and Overview (14:35 minutes)

1040 C 2) Detailed Review (25:01 minutes)

1040 Schedule F Farming (21:35 minutes)

1065 Partnerships and LLCs

1065 1) Basics and Overview (17:16 minutes)

1065 2) Company Cashflow (16:24 minutes)

1065 3) Owner Cashflow (19:49 minutes)

1120 C Corporations

1120 1) Basics and Overview (12:34 minutes)

1120 2) Company Cashflow (20:16 minutes)

1120 3) Owner and Global Cashflow (10:51 minutes)

1120S S Corporations

1120S 1) Basics and Overview (15:01 minutes)

1120S 2) Company Cashflow (20:10 minutes)

1120S 3) Owner Cashflow (21:20 minutes)

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5 Sources of Cash Flow to Pay Debt: What's your preference?

2010-06-10T20:23:42Z

It clearly takes cash flow to pay down a business loan. There are five places for it to come from in a business:

Cash flow from operations
Cash flow from selling off assets
Cash flow from borrowing money from someone else
Cash flow from owner capital contributions
Cash flow from running down cash balances

When you consider whether the business can afford the loan they are requesting, look to see if cash flow from operations will cover it. The other four are the back-up plan.

If you already have a loan in play and the cash flow from operations in recent periods has been insufficient, the Statement of Cash Flows can show you where the company is getting the money instead.

Cash flow from selling off assets

This will make a lender nervous. If the company has taken this route, find out if the assets they sold are no longer needed in their current business model. If they are critical to operations, is the company now leasing the same equipment on an as needed basis? Do they plan to continue this or do they expect to replace the equipment?

Cash flow from borrowing money from someone else

Yikes! This will definitely make a lender nervous. Find out what the company's overall plan is and when they need to pay those loans back. Borrowing long-term to solve short-term operating losses is generally not a good idea. That said, during a downturn the fact that the company borrowed from someone else and kept current on your loan payments might be a plus.

Cash flow from owner capital contributions

If the company is short operating cash flow to pay their debts, this might be the source you as a lender would most like to see. 'Coming to the table' to save the day is a good thing. Of course, you might wonder where the capital contributions came from and if that leaves the owner short personally.

Cash flow from running down cash balances

If the company had excess liquidity this is okay in the short run. The reason to have good liquidity is to have a back-up plan in a downturn. Look to see how much longer the company can do this without leading to a cash shortage.