Rod BristolProfit Mastery

Phone: (206) 284-5102Toll Free: 1-800-488-3520

Email: bristol@profitmastery.netFax: 206-282-4092

www.profitmastery.net

Increasing Your Clients Bankability(and Your Center’s Economic Impacts)

ASBDC 2012Annual Conference

SBDC Economic Impact Measurements

The performance of the SBDC is measured by the total economic impact achieved its clients.

Criteria that are measured include:

Increased business revenue and profit Business loans receivedSBA Financing Debt Financing Equity investment or other capital raised New jobs created and current jobs savedSuccessful start-ups

Extended engagement clients (EECs: clients that have 5 or more counseling hours with you)Long Term Clients (LTCs: clients that have a combined prep and counseling hours of 5+hours with you in one year)

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Sources of Capital

Equity: (Owner, Family, Friends)

Trade Credit: (Suppliers)

Net Profit After Tax: (usually not enough!)

The Bank: (Leasing Companies, Credit Cards)

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The Case of the Vanishing Banks (2012!)

In the 1960s the US had some 14,000 Banks and a large, prosperous thrift Industry.

Credit inflation and rising interest rates in the 70s eventually bankrupted the thrift Industry.

2011: Less than 7,800 Comm. Banks

2012: As of the 3/31/2012 FDIC Institutions Report: 6,263 Commercial Banks reporting in the US. There are also approx. 800 State Charted Banks = 7,270 total institutions.

And we are on track for 4,000 by 2019

“The Government is trying to put small banks out of business.”

What Does That Mean for Your Clients?

A continued erosion of local ownership

Fewer banks to approach in a smaller region

New, tougher loan approval requirements

Deeper scrutiny of the existing portfolio

“Know your Numbers or Stay Home”

The Bankers 3 Cs of DATA

CompleteComplete Income statement and Balance SheetIncluding a comparison to the Annual PlanAR and AP agingIf requested, a monthly Cash FlowExtraordinary Issues explained

ConsistentPrepared by a competent bookkeeper using appropriate accounting toolsFormats and pagination are maintained

CurrentMonthly is usually the new minimumIf you are in trouble, weekly can be required

Real Opportunities

For the Client whose business is making money and is well managed there are real opportunities.

The healthy banks have lots of money and need to lend it.

They are chasing a shrinking pool of good loan prospects.

Increase a credit line, acquire new technology, open a new location

Profit Mastery 2010

Banker’s Red Flags1. The business doesn’t make money.2. Inadequate, infrequent or inaccurate financial statements3. Hurried Loan request4. Unclear, poorly thought out loan purpose 5. Rapid, unusual inventory build-up6. Uncontrolled, unmanaged growth5. Inadequate Cash Flow and coverage of debt service6. Thinly capitalized operations (current ratio < 2:1) & cash flow is tight 7. Lousy or Marginal personal credit scores

• Lousy = sub 650• Marginal = sub 680

8. High accounts receivable concentrations if any customer is greater than 20% of total A/R and/or sales.

• Don’t know the major customers, economic forecast, trends, and payment terms.

9. No three year financial spread analysis 10. Don’t understand or use benchmarking for financial analysis11. Don’t know or understand their Key Performance Indicators

• Are they going to improve, stay the same or deteriorate- and know why.

12. Multiple entities that are not clearly divided for P and L and cash flow purposes.

13. Starting/buying a business with no previous background14. Any significant management change:

• Owner to kids or internal management• Significant owner health issue

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Profit Mastery 2010

Business Killers

1. Divorce – Owner or key employees

2. 50/50 partners

3. Retired in place

4. Absentee owner

5. Overuse of Credit Cards

6. Permanent, incompetent employees

7. Big imbalance between business and personal time

8. Lack of training/expertise – Business, Succession

9. Expensive or destructive hobbies

10. Rapid growth - Expansion

11. New technology

12. Embezzlement

13. Family transition

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Profit Mastery 2010

Golden Rules Evaluate carefully where your client fits in this list, then observe the

following guidelines. These are just some helpful suggestions in developing and maintaining good banking relationships.

1. Be prepared: think things through before they have to present them.

2. Let their banker know that they understand their business -- by helping their banker to understand their business.

3. Always keep the commitments they make; without credibility they have nothing.

4. Remember it's always best to borrow money when they don't need it.

5. Bankers often conclude that no news is bad news, so keep them appraised of the situation -- both positive and negative developments.

6. Know how much they need and what they plan to do with it.

7. Keep in mind that they need to build a relationship; they want their banker there when they need them -- and that's probably when they won't look so good.

8. Rates are negotiable, but they're not the only issue -- it's always strategically best to negotiate from a position of strength.

9. This is a sales situation: sell themselves and their abilities.

10. Remember the most important rule of all: there are really very few rules; with common sense and forethought, they can create new rules to fit the needs of their situation.

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Profit Mastery 2010

5 C’s of Credit• History of Business• Resume• Personal and business references• Bank references• Succession

• Debt Service Coverage minimum benchmark (1.25)• Global cash flow (Business and Personal) • Projections/Pro-Forma’s• Key Performance Ratio’s• Net Worth• Retained Earnings Growth• Working Capital• Debt to Tangible Net Worth (TNW)• A/R-A/P/inventory turnover (Cash Conversion Cycle)

• Loan to Value (LTV) • Appraised value to cost• A/R benchmarks• Equipment/rolling stock appraisal-evaluation• Invoice/down payment• Additional collateral-junior liens on real estate• Outdated or old inventory that is discounted• Work in Progress • Retention• Government A/R’s

• Debt to tangible net worth• Down payment• Subordination of debt• Outside investor• Distributions

• Volatility • Local, regional, state economy• Product replacement, improvement, or enhancement• Social-divorce or death• Business-stockholders, partners, ownership changes • Competition• Location

1. Character1. Character

5. Conditions5. Conditions

2. Capacity2. Capacity

3. Collateral3. Collateral

4. Capital4. Capital

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Profit Mastery 2010

Debt Structure

1

2

3Fixed Assets Leasehold Imp, Equip, Building

Permanent WC Cash Inv A/R

Seasonal WC Cash Inv A/R

Credit Card

Line of Credit

A/P

Int. Debt3-5 year

Long Term Debt

Retained Earnings

Cash Flow

Net Profits

Net Profits plusDepreciation

TimeTime

Financed ByFinanced ByAssetsAssets Paid Off ByPaid Off By

W/C = Working CapitalA/P = Accounts PayableA/R = Accounts Receivable

W/C = Working CapitalA/P = Accounts PayableA/R = Accounts Receivable

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Profit Mastery 2010

Sample Loan Package

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Five Key Borrowing Points:

1. How much do you need?2. What will you do with it?3. When will you pay it back?4. How will you pay it back?5. What if something goes wrong?

Profit Mastery 2010

LOAN PROPOSAL

Purpose of the Loans (There are two types)

Convert existing short-term notes of $165,000 to a long-term note to be repaid at $3,000 per month (plus interest)

Establish a credit line of $250,000 to finance expected seasonal fluctuations in inventory and accounts receivable

Repayment

Repayment on long-term financing will come from continuing net profits.

Repayment of the seasonal credit line will come from liquidation of inventory and receivables.

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Profit Mastery 2010

CORPORATE DATA

Corporate Data

Name: Olympic Flooring

Address: 2610 - 32nd Avenue N.W. Seattle, Washington 98139

Phone: (206) 589-3700

Date Established: February 14, 1997

Form of Organization: Washington Corporation

Incorporated by: Bob and Andrea Nelson on June 25, 1997.

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CORPORATE DATA

Description

Olympic Flooring is a Seattle-based corporation that wholesales flooring products to retailers and contractors out of a North Seattle warehouse location. The average customer is a small- or medium-sized retailer of carpets, linoleum, and window coverings; no one customer is key. Estimated sales for fiscal 2011: $1,430,000. Advertising expense has been low since most advertising is at the retail-level, co-op by manufacturer.

The primary focus of the business is service and delivery -- and the ability to keep fast moving items in stock. Most accounts are carried on a 2% 10/Net 30 basis; few customers take discounts. Contractors are generally carried on a Net 10 basis.

Distribution is from a central warehouse in North Seattle, which is connected to a small showroom and also contains the corporate offices. Lead-time on ordering for inventory is quite short and style changes generally occur once per year. The major supplier is Footloose Coatings. Footloose's terms are 2% 10/Net 30. Almost all the suppliers offer discounts, some even larger than 2% 10/Net 30. During 2010 there was one major price increase of about 5%.

Olympic operates out of leased premises and holds a very favorable lease through 2015. Location is not critical, although current location does provide excellent access for delivery trucks.

This is a distribution business and, therefore, depends upon efficient routing and/or shipping. Bad debts have recently taken an alarming upturn

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OPERATIONAL INFORMATION

Product:

This section includes narrative discussion of the following points:

(a) Classification code, including the principal products sold or services rendered.

(b) General development of the products and/or services during the past five years or since inception.

(c) Relative importance of each principal product or service to the volume of the business and the profits.

(d) Significant changes in types of product or services.

(e) A tentative five-year plan of the objectives and goals of the company, including anticipated revenues and earnings.

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EMPLOYMENT

(a) The total number of employees as of the date of the application, or the expected employment for a new venture.

(b) A description of the critical skills require in the business and availability of these skills within the present work force or within the local labor market.

(c) Description of labor relations (including any prior difficulties) and a copy of any current union contract.

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SOURCE OF SUPPLY

(a) A brief description of the significant materials and supplies employed or to be employed in the activity of the concern, including the adequacy of the available sources of these materials and supplies.

(b) Names of the major suppliers, including disclosures of any single or limited sources of essential materials.

(c) Adequacy of available storage and materials handling facilities.

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MANAGEMENT

(a) Detailed biographies on all officers, directors, owners, and key personnel, including, but not necessarily limited to: age, health, business experience, business affiliations, education and experience, time to be devoted to the business, and degree of ownership of the business.

(b) Any contract or proposed contract between the company and any member of management and/or outside consultants. Also include the name(s) of the accountant and/or attorney.

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Profit Mastery 2010

MARKETING AND DISTRIBUTION

A narrative discussion of the following:

(a) The type, number, location and financial strength of customers and potential customers (including the names of the five largest) indicating the percentage of the gross revenue accounted for by these customers.

(b) A marketing survey and/or economic feasibility study of a scope commensurate with the size of the company and the proposed investment.

(c) A brief description of the actual or proposed terms of payment by customers if other than cash, including the method of financing utilized.

(d) The methods by which the products or services are now (or will be) provided to customers, including the adequacy of physical distribution facilities (i.e., warehousing, delivery equipment, etc.).

(e) A description of the techniques presently utilized (or to be utilized) to create the demand for the products or services.

(f) Any significant seasonal aspects pertaining to the marketing of the products or services.

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Profit Mastery 2010

COMPETITION

A descriptive summary of the competitive conditions in the industry in which the concern is engaged along with the relationship of the applicant to its largest and smallest competitors.

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Profit Mastery 2010

FACILITIES

(a) A detailed description of the real and physical property and equipment, including age, condition, insurance coverage, and adaptability to the principal business in which engaged.

(b) Copies of agreements pertaining to any encumbrances on property or equipment owned, or lease or rental agreements on non-owned property.

(c) The same information for property proposed to be utilized by new ventures.

(d) Copies of any franchise agreement, distributorship, dealership, royalty contract, or similar contract with other companies.

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Profit Mastery 2010

REFERENCES

(a) List a minimum of one banking, one business, and three personal references for each member of management and each principal owner.

(b) Credit report on principals and company.

(c) Discuss the company's reputation with suppliers and customers; a small sampling should be taken. Ask the suppliers / customers about the company's reliability, credit-worthiness, fair business practices, etc.

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Profit Mastery 2010

FINANCIAL STATEMENTS

Historical

Balance sheets and profit and loss statements (preferably prepared by an independent public accountant) for a minimum of the last three fiscal years or from inception, including the latest interim period. Include a comparison with industry averages from RMA (The Risk Management Association).

Proforma

A proforma balance sheet which includes the effect of the financing, supplemented in the case of new ventures, with a description of the source of the original funds and assets.

Cash Flow

A detailed projection by month of anticipated revenues and expenses and a schedule of cash receipts and disbursements for a minimum of twelve months subsequent to the proposed financing. Proforma profit and loss statements for the next three years.

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FINANCIAL STATEMENTS

Continued

Accounts Receivable/Payable

An aging report of the last 90 days of both receivable and payables.

Personal FinancialsStatements for the principals.

Salaries and Benefits

Schedule of past, current, and proposed salaries and other benefits of each member of management and/or owners, including bonuses, free arrangements, profit sharing, stock options, etc.

Use of Proceeds

The reasons for the request for funds and a description of the proposed uses, including the timing of the requirement for funds.

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FINANCIAL STATEMENTS

Continued

Capacity of Business

A statement of the capacity of the enterprise, both current and subsequent to the financing, including the current and expected rate of utilization of such capacity and current backlog of orders in relation to the capacity.

Outstanding Debt

A description of all outstanding debt or commitments for funds, including the original balance, current balance, interest rate, and amortization schedule, and a copy of the instrument.

Prior Denial of Funds

A statement indicating whether recent requests for funds from other sources have been denied, including names and addresses of parties refusing funds, amounts requested, dates of applications and reasons for denial.* this item is for SBA direct-funded loan proposals

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If You Don’t Get the Loan…

If you get turned down at the bank, don't give up after thefirst try.

Instead, explore new strategies:

1. Ask for specifics on why the loan was refused. Some common causes are the bank's being overextended or not understanding your company's type of business.

2. Invite the loan officer and one of the officer's supervisors to visit your company -- to build confidence by showing off your equipment,facilities, and personnel.

3. Ask for ideas on how the application can be made more acceptablethrough financial or accounting changes, tax regulation, government programs, or production changes.

4. Apply for another type of loan or a different credit basis. For example, possibly pledging machinery as collateral, using a third-party guarantee, or borrowing against seasonal receivables.

5. Reapply when the timing is better. Use an upswing in sales or profits to obtain a line of credit or develop a close enough relationship with your banker to be informed when the bank has excess funds to loan.

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Idea Exchange

Share the best idea that a client has come up with to

‘Get The Money’ from their friendly banker.

It’s possibly worth $50!!