What does your lender really think of you? You should know, and here’s how to find out.

Many businesses have made a full recovery in 2021, while others are at least seeing light at the end of the tunnel. The economy is returning to some semblance of normal. Not to be overlooked in the midst of this good news, is the importance of lenders in the continued path forward. What does your lender think of your business right now? How are they viewing you?

Whether simply seeking a renewal, or rather additional financing for growth, an understanding of your lender’s view on your business is critical. Even with longstanding business relationships, the tumult of the past year and a half has impacted lenders, and how they view their clients, in multiple ways.

Here are 5 steps a business can take to successfully manage its lender relationships going forward.

1. Start the conversation early – Do you know how your lender views your business at this point in time? Regardless of how soon a financing event will arise, there is no time to waste in answering these questions. Gain as much insight as possible as soon as possible. Discuss where the business is and where it is headed. Discuss what the business might need going forward. And most importantly what does the bank want to see by way of information on the business?

2. Know how 2020 is evaluated - A key piece of information to understand is how the lender views this past year’s pandemic. Most businesses felt significant economic pain, for at least some period of time. How is the lender taking this setback into account? Some lenders are looking at businesses leading up to the pandemic, and then ignoring parts of Q1 and Q2 for example. Some are studying month over month financials very carefully starting pre-pandemic to present. Others are including some or all of the PPP proceeds in evaluating the historical financial performance. Even if there is no new financing need, does this disruption affect covenants? And for the lucky few that saw record years in 2020, the question of sustainability arises. For example a company that sells cleaning products may have seen a massive uptick that the bank may question whether it is sustainable. Being armed with this information will guide next steps.

3. Prepare good monthly trends – Regardless of how things are being evaluated, they are being evaluated in more granularity. This makes accurate month to month trend information essential keep track of. Can you produce this information? Ensure that you have the ability to demonstrate a picture that supports company performance. In turn, this should excite a lender to continue and grow a relationship. Take a step back and view your monthly history. Does it support sustained growth? Are there a couple blips along the way that require explanation? The information you provide will tell a story that may require additional context, but if the information is poor, you may lose out before even getting started.

4. Forecast, forecast, forecast – All lenders we are seeing want a forecast into the future. They are not expecting 100% accuracy, but a picture of management’s best idea on where the business is headed is valuable to them. This might be just for the balance of 2021, possibly 12 months from now, or even through 2022. Ask the question and be prepared to show what the future might look like. And just like historical trends, be prepared with the key assumptions and context that a lender might ask about.

5. Limit risk – Banks are not in business to take big risks, so creating a picture for the bank that mitigates risk is the final cog for a business. How does your liquidity look? What about the collateral the business has? How do you show this to the bank? How can you demonstrate an ability to confidently repay any existing debt, but also support additional capital? For many businesses, using the steps above to demonstrate sharp management through and out of the pandemic can be a great source of confidence.

Capital is out there for the right opportunities, but lenders are not obligated to lend you money. Sell potential lenders on the promise of you and your business. Create a holistic business case for what you are seeking. Get out there and grow boldly.

What If?

Whether in uncertain economic times or times of growth, entrepreneurs constantly find themselves having to make decisions with less than perfect information. Thankfully, there is a powerful tool and one essential question, that can significantly aid in that process. What if? It is impossible to perfectly forecast or predict the future, but by having an intentional process to evaluate next steps and the myriad of possibilities, it can provide confidence to management teams and the all-important sleep at night factor to the CEO.

The question is established, now what? Here are some key best practices:

• Involve the team – Get input from the management team and key internal stakeholders. If this is an initiative for a new product for example, how does the sales team feel about it? What is operations saying about the ability to execute? Are their potential supply concerns leading to possible delays, or potential issues in production? From a financial perspective, what is the investment required depending on these factors? How much movement could there be in margins based on all these factors. Ultimately, what are the key factors of success? What are the possible impediments that could get in the way? Ask the team for multiple scenarios, perhaps a low, mid and high. Quite literally, ask the team “what if?”.

• Map it Out - Now that this information gathering process is complete, get things down on paper. This creates an ability to see the whole picture in one place and memorialize information. And just like in the first step, involve the management team in assessing this holistic picture. A common mistake is letting prior biases drive decisions too quickly, so having multiple brains to leverage can create new questions and answers in the process.

• The Key Drivers – With this picture, it will become clearer to narrow down the key drivers that will impact the outcome of the decision. Not every factor will ultimately be material in the process. Using our above example of a new product, the time to initial launch could be extremely important (such as the 4th quarter for a retailer), or not important at all for a business with no real seasonality or market pull. A similar approach will help focus in on those factors that really move the needle – capital investment, volume, cost, market demand, etc. Using financial models to move variables around is very helpful in this process. By capturing assumptions and then moving them, the impact of the change can be visualized and evaluated. What would the outcome be if costs are 5% higher than planned? Or if more payroll is required? What if sales are too strong? How does that impact internal supply?

• Build the guardrails – Small businesses are constantly operating with finite resources. A failure to execute as hoped can chew up capital and resources quickly. Growth can also have a similar impact if cash is tied up in production or if customer terms stretch more than expected. What are the bounds within which the business can operate? If the business is a car going down a windy road, the key is keeping the car from going off the cliff. Understanding and firmly establishing the guardrails on either side can serve as a great compass to navigate with.

• Observe and respond – The key here is that if the above process is followed, the business likely has already thought through the scenario that is actually occurring and can respond, instead of just reacting. This creates a proactive process where the business is able to nimbly pivot because it has already contemplated possible outcomes. If sales start out slower than expected, the business should have already contemplated how much additional capital it could use to support the ramp up, or perhaps other areas of marketing spend to explore to add more fuel to the engine.

This what if process can be used as part of the overall annual planning process as well as iteratively throughout the year as new business decisions are being explored. It is one of the most powerful processes we have seen businesses use, especially during the chaos of the pandemic in 2020. Seek input, take a step back, determine what moves the needle, and understand where the guardrails are. Entrepreneurs excel at driving the car, often quickly. This process can make the journey more successful and keep the car running at its best performance. Get behind the wheel and be confident whether that pothole appears, or the speed limit suddenly goes up.


Finding the “Right” Growth

Growth in general is highly sought after in business. Unfortunately, it has also become a term thrown around much too loosely, and without context, growth, in and of itself, can hurt businesses at times much more than it helps. At Fintrepid Solutions, a phrase we repeat often is “growth breaks things”. We have seen it time and time again. We are proponents of intentional growth, where deliberate thought has gone into the goal itself and why it matters, and equally important, what it will take to get there, including potential pitfalls along the way. So the aim then becomes, how do you find the right growth for your business? Here are some considerations to contemplate.

Defining it – What does growth mean? Is it growing market share? Revenue? Margin? Profit? Something else? These are all very different goals that have different requirements for success. The CEO and leadership team need to have clarity around this. The answer could be to grow revenue by 15% and hold profit margins. It could be to keep revenue flat and grow gross margins. Both could be great answers, but simple growth overall can be unclear and problematic.

Intentionality – As referenced above, the key is to understand what the goal is and more importantly why it matters. A company can grow revenue by 10% but see profits stay flat. Is that successful growth? The answer is again maybe. Perhaps the company needs to grow to be competitive in the marketplace just to maintain its position or to achieve the same buying power. On the flip side, if there is not an ancillary benefit beyond what shows up in the financial statements, this kind of growth may not be desirable as the business may have added more people, more volume, more complexity, and more headaches to achieve the same net result. What is the desired growth goal and why? Start there.

Current Assessment – A very stark look at current reality is essential. Where are you now? What led to growth historically? What has hindered growth? Evaluate the good and the bad, the great choices and the mistakes. These answers can provide great context for what is ahead. What can be leveraged further and what is needed once that goal is clearly defined? Too many companies have simply compounded or repeated past mistakes by not evaluating the journey thus far in establishing future growth goals. All dreams have some basis in reality. The same applies in business.

Resources & Capacity – This is often overlooked in evaluating growth. Growth is stepped. As the diagram below shows, while revenue growth for example might be a line, the capacity, and resources that a business has will fluctuate over time. Growth is a constant toggle between capacity and investment. Often business owners think of capacity in a manufacturing setting, but this could be any combination of people, equipment, or just general infrastructure. Capacity is a key issue to understand in all businesses. Each time an investment in resources is made, the businesses capacity should grow, that spend can then slow while the capacity is absorbed. This process then continues on the next step. In the diagram, there are three companies, A, B and C. Company A may find itself in a situation where its revenue growth is unstable as it is outstripping the resources to support it, possibly leading to systems issues, an overtaxed workforce or quality control concerns. Company C is growing revenue too slowly for the investments made and is investing resources while capacity likely still exists. Company B is in a place of greater stability, utilizing capacity effectively over time and investing in line with growth.

Cash, cash, cash – Cash is the lifeblood of any business, the gasoline in the fuel tank. Driving too far and too fast can cause the car to stop suddenly. Growth typically uses large amounts of cash, so even if the net profit in a business is increasing, the cash position can be getting even worse. Larger orders from vendors may be needed, terms from new customers may be less favorable, more money can be tied up in people – cash often comes down to timing. We have seen companies grow themselves out of business as a result of cash shortfalls. Understand the impact of the growth goals on cash before getting too far down the road to ensure there is enough fuel to get there.

The trickle-down effects – What does the desired growth mean financially? What does 20% revenue growth mean for gross margins? Will they be consistent? Is there an opportunity to get better pricing from vendors due to volume and margins could improve? Perhaps an investment in a sales team is needed now to hit the 20% in the following year, meaning profit will potentially decline in the coming year before growing in year 2. Understanding the interplay unique to each business with revenue, gross margins, EBITDA, net profit and free cash flow will ensure alignment in the growth plan.

The market – A final gutcheck is looking at the broader market. Is the competitive landscape so intense that growth could be hindered, or is it wide open? Is there an opportunity to modify a product to increase margins? Or could larger sales opportunities be more profitable. Could growth land the business on the radar of larger competition? We have seen many instances where growing businesses have faced downward pricing pressure over time as competitors begin to take them on more seriously. Understanding the broader headwinds or tailwinds can and often should alter growth planning as well.

Growth is exciting. It is part of the entrepreneurial DNA. The right growth leads to sustainability and increased value. The wrong growth has caused businesses to severely stumble and even fail. Being thoughtful, intentional, and clear can make all the difference.


Budgeting Process Best Practices

It is the time of year where budgets are a frequent discussion point. This year of course with all the uncertainty in the economy, many businesses are struggling with how to start or how to have faith in planning for the new year. However, with a good planning process, budgets can be developed with confidence in any season.

First and foremost, the key word is process. Too many companies establish budgets without an intentional process. This can lead to poor assumptions, confusing comparisons to actual results or a focus on the wrong numbers in the business. For small and midsize businesses, there is no one size fits all approach, so relying on best practices to help shape the best process for each business is a great approach. So, what exactly does that look like?

An often-overlooked area of the planning process is learning from the prior year. Not just where were numbers missed, but why? Was the assumption bad? Was there an execution miss, or was it a broader economic issue? The answer here is essential to plan forward. And a benefit out of the pandemic and economic disruption was that it created something of a laboratory learning environment for many businesses – exposing unseen weaknesses, providing a testing environment for new initiatives and strategies, and reassessing operating structures. There is a wealth of information to be relied upon in these current market conditions. Ultimately, there should be far more questions asked than answers provided, especially in the early stages of the process.

There are a number of approaches and styles to deriving numbers - top down, bottom up, and others. What matters most is that the budget is based off the drivers of the business. What really moves the needle? Is everything a trickle down function of revenue? Are the bulk of the costs above gross margin, meaning volume could be the key driver? What about customer mix or headcount? Do contracts, either customer or vendor, play a huge role? The drivers may not show up directly in the P&L. Many times, businesses are focused on areas that don’t ultimately drive the desired impact – for example, growing revenue without realizing it will require a lot more overhead, or spending disproportionate time on areas of spend that have little impact ultimately on the bottom line. A year like 2020 demonstrated the importance of understanding drivers as a business changes.

Understanding the impact of different scenarios is also critical. Using the drivers above, what happens if revenue is 10% higher or lower? What if it requires more marketing spend to generate the same dollar of revenue? After the set of initial questions in the process, the question of “what if…?” is one of the most powerful any business can ask. While briefly mentioned as an example above, a deeper look at mix can be very impactful. Certain customers can have a different margin profile. It often makes sense to look at the top 5 to 10 customers or segments of customers. How does a shift in volume affect overall margin and profitability? For many companies, this mix changed as a result of the pandemic. Look at mix – what if it stays consistent or reverts – what is the impact either way? Move numbers around, look at the impact. This will provide confidence in the bounds in which the business will operate. Very few businesses are going to nail their budget across the board next year but understanding the lanes of opportunity and impact is even more valuable long term.

We have always been advocates of 2 sets of numbers in many businesses. For example, a more conservative budget that expenses are planned off of, and a more aggressive top line and or margin forecast. With this approach, a business is far less likely to spend ahead of the revenue, ensuring increased rigor around profitability and cash, especially during times of uncertainty. Then as the conservative targets are met or exceeded, it affords the conversation around adding further spend, but in an intentional manner.

The budget process is by nature continuous and fluid. It does not stop once the plan is on paper. Budgets should be reviewed, at least quarterly, and at times monthly. What new learnings have developed? Given all the economic uncertainty heading into the new year, new plans may need to be developed as information is gathered over time. This does not mean the budget is thrown out the window by any means. It is still a crucial baseline with which to evaluate business performance, so revisions are more of an “and” than an “or”. Perhaps a large new customer emerges, perhaps a current one shrinks materially. Or perhaps there are positive or negative competitive pressures. These can warrant revisions to aid in decision making as the year goes on.

Now is a great time to re-examine the planning process in the business. Adding these best practices to the process can provide more clarity, confidence, and ability to respond to changes in the future. The seas will continue to be choppy. By plotting the course carefully and intentionally, a safe, successful journey can be made much more likely.


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or growboldly@fintrepidsolutions.com


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