"Bankerese" and business consulting services on banking
Posted by Bill McDermott on Wed, Aug 04, 2010 @ 02:26 PM
photo by gadget virtuoso
Bankerse, a foreign language only spoken by bankers. Have you ever had the experience where you had a hard time understanding what your banker was saying to you. Jokingly, I had a client ask me if that was one of the business consulting services on banking that I offer. He told me "I don't understand my banker, everything I thought was good, he thought was bad and vice versa"
Well, yes I speak bankerese. So, I could interpret for my client. However, I thought there might be a short list of terms that bankers often use that may be confusing. So, here goes:
1) Leverage-when used by a banker, he/she is referring to the amount of debt used in proportion to equity used to finance your business. Remember the 80-20 rule here. Bankers are comfortable with 80% of assets financed with debt and 20% financed with equity. More than that is high leverage, less than that is low or modest leverage
2) Liquidity-When used by a banker it can actually mean a couple of things. On your personal financial statement, it can mean the amount of liquid assets you own (non retirement) personally. Cash, marketable securities and cash value life insurance. For your company, it can mean the same thing or it can mean the amount of current assets in excess of current liabilities. This is also the definition of working capital, another banker measure of liquidity.
3) Cash flow- this usually means the amount cash generated by the business in excess of it's expenses. Sometimes a banker can mean just profit. But, cash flow can also mean terms like EBT (earnings before taxes), EBIT (earnings before interest and taxes) and EBITDA (earnings before interest, taxes, depreciation and amortization)
4) Receivables, Payables or Inventory turn-this is the number of times these assets or liabilities turnover in a year. It can be expressed in a turn or it can be expressed in days. If you collect your receivables in 35 days, your turn would be 10.28 (360 days in a year/35 day collection period = 10.28 receivables turn)
5) Loan covenants-a covenant is a mutual promise by both parties. For a banker, loan covenants can be non financial and financial. An example of non financial is a covenant where both parties that there will be no change of company ownership or management during the loan. An example of a financial covenant is a cash flow or leverage covenant. Most banks want cash flow to exceed loan payments by 25%. So, you will see a cash flow covenant of 1.25x meaning cash flow/loan payments=1.25 or greater. The leverage covenant is typically debt/shareholder equity=4 to 1 or less.
Bankerese can be a foreign language, but hopefully this will give you a few common terms to get you started and on your way to becoming fluent.