Your personal guide to business banking invites you "Inside the Vault"

Subscribe via E-mail

Your email:

Ask Bill to speak

Browse by Tag

From Inside the Vault...

Current Articles | RSS Feed RSS Feed

Growing Your Business-Getting the Right Processes


We’ve talked in this series about Growing Your Business- Getting the Right People and Getting the Right Strategy.  Today, we’re going to talk about Getting the Right Processes.


Growth always increases the complexity of your business.  So, to get the right people, doing the right things right, you need processes in place to maximize your efficiency and effectiveness.

describe the image 

Here are three things you need to know about processes:


1)   Process makes a business competitive.  Companies with defined processes are better able to evaluate their strengths and weaknesses and identify opportunities for improvement.

2)   Process enables growth.  By leveraging defined processes, it become easier to deliver new products and services quickly and efficiently.  Processes provide a blueprint for new employees and enable cross training to minimize business interruption.

3)   Process drives profitability.  A company with defined processes can find opportunities to improve efficiency without sacrificing quality and consistency.  They can identify duplication of effort and spot areas that are being overlooked.



Here’s a story of how implementing new processes made a huge impact on my client’s profitability.  This company was losing money in 2014.  They had bootstrapped the company, but now had to borrow money from different sources just to fund payroll.  They didn’t know where the losses were coming from. 


  • Process 1: They hadn’t taken the time to be sure there financial statements were accurate and that revenue and expenses were properly categorized.  They established a month end close where part of their closing procedure was verifying that all revenue and expenses were properly categorized so their financials were timely and accurate.
  • Process 2: They didn’t have a process to examine what portion of their payroll was converted to billable revenue.  So, they didn’t really know how much of their payroll was unprofitable.  They created an excel spreadsheet to show monthly payroll and how much of that could be allocated to their contracts.
  • Process 3: This Company did not have a process to make sure their completion schedule of their projects matched their billing schedule.  They didn’t know if they were over billed or under billed on any of their projects.  So, they created a second excel spreadsheet to show what percentage they were complete on each project and then billed accordingly.


The process changes, in this case, yielded a huge change in the profitability and efficiency of the company.  They had accurate and timely financial statements to make good business decisions and they cut payroll and increased billing based on the new excel spreadsheets, which in turn dramatically improved profitability.


What process changes have you made or need to make to enable your growth and increase profitability?

Growing Your Business-Getting the Right Strategy


Strategy can be difficult to define, but a good starting point might be how we win in the period defined? (month, quarter, year, 3 years etc).  Many business owners analyze the past to determine the present and the future.  Others look at the market or industry and from that anticipate how they will succeed in the future.

Many of my clients are looking at strategies to address current performance around several areas:

  • Increased profits, cash flow or cash
  • Growing revenues from existing or new clients
  • Collecting accounts receivables faster
  • Talent acquisition or talent development
  • Outsourcing expertise that is outside your core competencies (IT, legal, accounting, HR)
Sometimes it's hard to focus because you have so many strategies that you can have what I call "paralysis of analysis."  I would encourage you to pick your top priorities for the quarter and focus on those.  These are five things I would suggest you implement to have success growing your business:
  1. Pick your top 5 strategic priorities and focus on those.
  2. Communicate those to your staff so that you have everyone on the same page.
  3. Measure the success of your strategies by looking at the critical numbers in your financials that pertain to that strategy. For example, look at your AR balance if you're trying to collect faster.
  4. If you're not seeing results, look at the execution of your strategy to troubleshoot any barriers to success.
  5. Be sure to celebrate if your strategy is successful for the quarter/year.  Everybody loves a celebration!
I have several clients right now that are experiencing good growth, but are having difficulty maintaining their profit margins and sufficient cash to finance their business.  If your strategy pertains to growth, be sure to focus on critical numbers like revenue per month/employee, gross profit margin and cash.  
How are you doing on your strategic priorities for 2015?  I hope this article and others can help you be even more successful than you already are.

Growing Your Business-Getting the Right People


I heard a speaker at a conference say that many business owners feel that their most important assets are their clients.  However, he disagreed.  He stated that our most important assets are our people/employees.  Our brand rises and falls on their efforts.

growing your business

This is not intended to be written from a human resources perspective, but from a financial perspective.  If we invest in people, how do we measure our return on dollars spent? Is there a formula for fixed vs variable compensation? 

Here are a few things to think about:

1) Watch out for high dollar fixed expense.  If you're hiring top talent, and alot of it, make sure, you are getting the proper return.  For example, if you just hired a VP of Sales with a $100,000 and you have a 35% gross profit margin.  You would have to see an increase of over $285,000 in revenue just to break even on their salary.  Watch out that fixed compensation doesn't eat up your profits.

2) For sales people, when possible, implement an element of performance based compensation.  Employees love for a large portion of their compensation to be fixed. A business owner would prefer for a large portion to be variable.  Why?  Because you can tie their compensation to actual performance, revenue or gross profit.  The lower the fixed portion, the lower your overhead and the higher their variable piece if they're really good sales.  If they're not, they won't last long.

3) Everyone has their own metrics or measurements on return on people investment.  When possible, I really try to shoot for a 20-30% return (I call it return on spending)on compensation dollars spent.  For example, if I hire a controller and pay them a salary of $50,000, I would hope there would be ways I could see a $60-65,000 improvement in business (efficiency, faster collections, taking discounts etc.)

I think one the biggest challenges most business owners have right now is finding the right people for their organization.  Make sure you're doing things to attract top talent to your organization and continue to invest in their future.

Making Your Company A Financial Success Part 4-Selling Your Business


Part 1- Cash Flow

Part 2- Establish Working Capital

Part 3- Growing Your Business

When should you sell your business?  First, the business and the owner(s) should be ready.  There’s a common phenomenon called the rolling 10-year which is the business owner’s time horizon for a sale.  What that the means is if you asked the business owner five years ago, today or five years from now, the answer would always be 10 years.  You only sell your business once, so it's essential to prepare for it.

describe the image

Here are five things to consider when you sell your business:


  1. Get agreement with yourself or your partner on your timetable and business value at exit.
  2. Do you have a leadership team that can run the business while you’re out for an extended period of time?
  3. Are there financial statements available that are timely and accurate (possibly audited)?
  4. Do you have projections that are aligned with your exit plans?
  5. Do you prepare annual budgets and have historical record of your performance against those budgets?


I’m ready to sell what’s next?


  • Determine the minimum sales price you’re willing to accept.  You may need to live off these proceeds for life, so get professional help when determining this.   
  • What’s the fair market value for your business?  It’s likely the EBITDA (cash flow) x a multiple (probably between 3 and 5).  So, if your cash flow is $300,000, then the fair market value could be between $900,000 and $1.5 million.
  • Try to reduce the perceived risk in purchasing your business (experienced management team with incentives tied to a sale, audited financials etc.)
  • When the fair market value exceeds the minimum sales price bring in your deal team (M&A attorney, CPA, investment banker and wealth management advisor).
  • Two things to keep in mind, sell when the market is hot and sell high when you’re having fun.


You remember the old adage; failing to plan is planning to fail.  You only exit once so do the proper planning to get you and the business ready for sale and have some realistic expectations about time horizon and the sales price.  

This concludes our four-part series on "Making Your Company a Financial Success." If you haven't already read the other three parts of this series, you can find them linked below.

Part 1- Cash Flow

Part 2- Establish Working Capital

Part 3- Growing Your Business

Making Your Company A Financial Success Part 3-Growing Your Business


Part 1- Cash Flow

Part 2- Establish Working Capital

"Growth always requires cash and increases complexity," says a popular business growth guru.  Statistically, only about 4% of the companies make it above $10 million in annual sales in the US.


profitability coaching

Doug Tatum, in his book, No Man's Land will tell you it's because of one of 5 M's.

  1. You have the wrong operating Model
  2. Your company is not properly aligned to the Market
  3. You've outgrown your Management
  4. You've outgrown your Money
  5. Your company has lost Momentum
Vern Harnisch, in his book, Scaling Up will tell you that there's a breakdown in one or several of the following areas:
  • People
  • Strategy
  • Process
  • Execution
His approach is that a business determines the strategic priorities for each month, quarter, year and then uses his/her data to keep score on the level of success. Getting your people engaged in the process using critical numbers or key performance indicators (KPI's) to create focus is key to gain alignment of thinking between shareholders and employees.  The concept here is to determine the barriers you need to overcome to expand the business and either add people, create processes or improve execution.
What I've found is that both are true and both these points of view are necessary when evaluating your business.  
Many times, companies need to add people in middle management to handle duties that correspond to changing complexity of the organization.  Often, one person may be handling sales, operations and finance.  Over time, many businesses have one person handling each of these three areas.  A lack of any one person can cause the business to breakdown in the area that lacks management.  
Due to a positive economic environment, many businesses are expanding geographically or increasing product lines, but they don't have a strategy, processes or execution in place to make those successful.  Therefore, they may have added resources, but they're not getting a return on their investment (people, systems) which causes margin to decline or they become less profitable.  
When you start your business it may merely require a good technician to complete the work.  In later stages, management is needed to create processes and monitor performance.  Finally, a mature company really needs entrpreneurial vision to understand the changing dynamics of the company and its market.  This requires vision to create strategies to implement.
How do you grow you business?  More often than not, most of us spend too much time working in the business instead of working on the business.  
Are there ways for you to upgrade your people, improve processes and capitalize on new opportunities?  These items are critical for you to overcome barriers to expansion and prepare your company for financial success.

Making Your Company A Financial Success Part 2 - Establish Working Capital


In Part 1, we talked about the importance of improving cash flow and the cash balance in your company’s bank account.


Today we’re going to talk about establishing working capital, specifically obtaining a line of credit from the bank.  A line of credit provides cash to supplement any working capital needs you have that you can’t meet internally.  How do you understand and meet the bank’s criteria for credit and get the best terms available?

profitability coaching


If you haven't read some of my other articles on finding financing, here’s what you need to know:

To be bankable, it requires a solid financial foundation for your business.

  • Profitable- You should have profits sufficient to cover the interest expense for the line and more.  Preferably, you should have consistent profits for the past three years.
  • Activity-You collect your receivables within normal terms for your company and industry, with little to no bad debt experience.
  • Leverage-You have a well proportioned balance sheet with $3 of debt or less to every $1 of equity.
  • Liquidity-You have sufficient cash balances to handle normal business with between 7-30 days of sales in cash.

Your bank package and presentation should meet the bank’s criteria for credit and you should understand the bank’s criteria for credit which include the above items and the following:

5 C’s of credit:

  • Character-You should be a person of integrity and run your business on principals consistent with that.
  • Collateral-You have sufficient collateral to cover the line of credit amount with the appropriate bank margin applied. (ex.  80% of AR < 90 days)
  • Cash flow-You have adequate cash flow to repay this debt and any other debt outstanding with at least at 25_30% cushion.  The bank’s call this 1.25-1.3 debt coverage.
  • Credit-You should have a business and personal history of repaying credit on time and within the terms established by the lender.
  • Conditions-You should be able to explain the economic conditions of your industry in a way to minimize any perceived risk of the bank loaning to you or others in your industry.

You might be thinking this is a lot of information.  You’re right, it is.  Banks can only afford to lose about 1% on the loans they make.  Remember they’re not loaning their money, they’re loaning their depositors' money.  It can take as many as 10 loans made and paid back for every loan where there’s a loss.  For these reasons, it’s hard to borrow from a bank, but following these steps should help in providing the working capital you need.


So, how much of a line do you need?  One month’s revenue or expenses would be a good place to start.  Your request may be more or less depending on your specific situation.


Cash flow ebbs and flows based on the characteristics of your business (growth, seasonality etc).  A line of credit can smooth out some of the ups and downs.


How have you established working capital for your business?



Making Your Company A Financial Success Part 1: Cash Flow


Step 1: Improve your cash flow

Improving your cash flow can be defined as either having more cash or being more profitable.  Some people mix the terms cash flow and profits.  For business valuations, most people agree that a business can be bought and sold based on a multiple of cash flow (earnings before interest, taxes, depreciation and amortization or EBITDA).   Earnings/profit is a big component of cash flow.

cash flow


Many business owners are so busy working in the business; they haven’t taken the time to identify the drivers in their business that can dramatically improve cash or cash flow.  By doing some financial statement analysis, you can uncover what those are and then decide to implement strategies that have the greatest impact.  Your analysis should include not only your historical performance, but also some benchmarking of how you compare to your industry peers.


Verne Harnisch, author of Scaling Up has a Cash: The Power of One document that shows the effect of either a 1% or 1 day improvement on cash or cash flow.

 For example:

 Cash flow improvements


Sales $12 million       a 1% volume or price increase has a $120,000 effect on cash flow

 COGS $8.4 million      a 1% decrease in COGS has a  $84,000 effect

 Overhead $7.6 million a1% decrease has a $78,000 effect


Cash improvements

Improve AR collection period ($12 million/360 days in a year, $33,333) 1 day improvement is $33,333 more in cash

 Improve AP payment period ($8.4 million/360 days in a year, $23,333) 1 day improvement is $23,333 more in cash


As you can see in the above examples, the total opportunity for improved cash flow is $402,000 if you were able to influence a 1% volume and price increases along with a 1% decrease in COGS and Overhead.

You could improve your cash position by almost $57,000 if you could collect AR 1 days faster and pay AP 1 day slower.

This approach to managing by the numbers can give some understanding of the impact of various decisions you make in your business. 


How do you improve cash and cash flow? 

Exit Planning Part 2: Are you AND your business ready for a sale?



Part 1: Are you ready to sell your business?

If you’re really thinking about selling your business, the business must ready and the business owner(s) must also be ready.  If you have a partner, please be sure you have agreement on:


  • A timetable when to sell the business
  • A minimum sales price; factoring in taxes, any debt repayment and closing costs
  • The amount of time needed to get the business ready for sale

 selling your business

To get the business ready,


  • the business owner needs to successfully create a leadership team so the business can run successfully without him/her for an extended period of time. 
  • the business should be able to prepare financial statements that are timely and accurate.  In most instances, the owner should consider obtaining audited financial statements by an independent CPA to give the buyer confidence. 
  • A written business plan with detailed projections that meet the criteria of your exit plans are critical for any potential purchaser. 
  • Budgets with actual performance can give weight to the management team’s ability to project future business.
  • The owner should consider financial incentives to the leadership team for two years after the exit.  Some call these stay bonuses or phantom stock is an option.



To get the business owner ready,


  • He/she should have an idea of what amount of income is wanted from the business to provide an annuity based on a certain rate of return and life expectancy.
  • What will you do to replace the time?  Selling can be difficult, if you don’t have something to go to.   There’s only so much golf, fishing or traveling you can do.  When you’ve done all that, what gives your life purpose and meaning?
  • Generally, you only sell your business once.  These are many of the items needed to consider a successful sale of your business. 
  • Nobody times the market, but try to sell at peak time when your business is extremely attractive.

Are you ready to sell your business?


I’ve had several clients recently who have been or are being approached by potential purchasers.  Have you thought about selling your business?  If so, to an insider/outsider? Maybe you just want to close doors once you decide to retire. 

Maybe you’ve been so busy running the business, you have no idea how to sell your business or what number you’d like to get from it in order to retire.  Here’s some things to think about.

 selling your business


Selling your business:

  • Most owners will sell either to an insider (key employee, manager) or an outsider (competitor, financial buyer looking to diversify their holdings)
  • This could be an article all by itself, but it’s a long distracting process. 
  • Make sure you have a good attorney (legal documents, non disclosures, letter of intent) and a good CPA (tax consequences of the transaction) and a business broker/advisor to guide you through the process.
  • Most businesses sold are an asset purchase which means the seller pays off the debt of the company and pays taxes on the gain from the sale (sales price-company basis). Your CPA can tell you your basis.


What’s your number:

  • Most businesses are going to sell for a multiple of revenue or cash flow. Typically, this is somewhere around 1x revenue or 3-5x cash flow.
  • Could be higher or lower depending on the industry or the strategic fit for the buyer.  “Beauty is in the eye of the beholder”  How bad does the buyer really want it? 



What do you want/need:

  • Of course, this can be two different answers.  Most sellers are looking for a way to monetize the investment in their business approaching retirement or when they ready to do something different.
  • One way to look at it, is what amount of income do you want the business to give you after taxes and paying off debt?  You have to assume a rate of return and whether the income includes dipping in to the proceeds from the sale.
  • In many instances, your business will not generate the level of income you want because the value is too low or the rate of return is unrealistic given market conditions.
  • You’re then faced with a choice.  Should I keep running the business to make it more valuable or do I sell and look to other investments to give me the income I’m looking for?  The choice is yours.


Has Your Loan Become a Problem for the Bank?


When you hear the words "Special Assets", you're past due, you broke a covenant in your loan agreement or the value of the real estate is less than your loan balance, your loan may have become a problem for the bank.

problem loan negotiations

Watch out for the "good news, bad news" conversation your banker may be having with you.  You might be smiling like the couple in the picture only to be told later that the bank will not be renewing your loan when it matures in the next 90 days.  Here's a couple of situations that could signal that there's a problem:

Loan Maturity

From the bank's standpoint, all bets are off when your loan matures.  Even though they may have renewed it several times before, loan maturity does not equal loan renewal.  If you:

  • lost money last year 
  • your real estate declined in value to the point where it's less than the loan balance
  • you've had losses
  • broke a covenant or 
  • had a material change in your financial position

the bank will use the maturity of your loan to work out these issues.  If they are significant, you could get a new account officer with the Special Assets Department.  Special Assets is where the bank puts all their relationships that they are trying to move out of the bank due to excessive risk.

Past due Payments

Your term loan/mortgage loan has default language that the bank can use if your payments are significantly past due.  Default language can include increasing the interest rate or charging a late fee on late payments.  Your payment history can play a part in your bank's willingness to renew the loan when it matures.  

You broke a loan covenant

Loan covenants matter to your banker.  They wouldn't be in your note, loan agreement or commitment letter.  A covenant is a mutual promise that you both agree on.  A condition of being able to continue to borrow money is you keeping your side of the covenants.  They can be financial or non financial.  A cash flow covenant or leverage covenant are the most common financial covenants.  If you have losses or excessive distributions to the point where you break covenants like this, the bank has the right to declare a default.  You didn't keep your promise, so they're not compelled to keep theirs.  Changes in ownership or management, filing bankruptcy or legal matters like liens or judgments are examples of non-financial covenants that could trigger defaults.  A covenant default (you break a covenant and the bank declares a default) is not the end of the world.  It's a signal to you that the lender wants to talk about what happened and why.  They may want to enforce the covenant (you have a problem) or they can waive the covenant default (a slap on the wrist, don't go it again).  If they waive the covenant, be sure you get that in writing from the bank.  If you don't and you get CPA reviewed or audited statements, your CPA will need it to comply with their professional standards.  But you should get it in writing whether they do or not.

Your loan balance is higher than the appraised value of the real estate.

During the Great Recession, this was the demise of many banks.  A lot of banks loaded up on real estate loans only to find out that the values declined faster than the amortization.  This became such a problem that the regulators forced banks to order regular appraisals and mark to market their loan balances based on the appraised value.  If your loan balance was $200,000 greater than the appraised value, the bank had to set aside that amount in loan loss reserve to cover the difference.  While the bank makes an adjustment on their books, you still owe more than the real estate value.  If you default, or at maturity, the bank could ask you for a pay down of the loan or additional collateral or a combination of both to shore up their position.  

You lost money, declared bankruptcy or had a material change in your financial position

Most notes or loan agreements will have default language in them that gives the bank the right to declare a default if the borrower or guarantor declared bankruptcy, or had a material change in their financial position (had losses or took out a big loan which changed the leverage of the company).  The bank gets to decide what is or isn't material.  These kind of changes signal financial distress and are big red flags to the bank.  

Many times, you've created a situation that triggers a default unknowingly.  The bank holds you responsible/accountable for anything you signed when the loan was funded and expects you to maintain the business the same way when the loan was originally made.  If external factors created the issues, it's still your responsibility to discuss the problem with your banker and seek a solution.  The issues usually can be resolved by either contributing more capital to the company or pledging additional collateral to the bank.  

All Posts