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Managing the Financial Turnaround Process in Retail
Five Essential Steps to Turn Your Business Around
Having problems meeting your bank loan? You're not alone these days.
What can set you apart, however, is being pro-active about resolving the problem. Start now to address your situation. Manage the "lead time".
Here are the 5 key steps to follow, starting now!
Perhaps you are not down to the wire on your loan, but you foresee the potential for trouble. Don’t hope your banker won’t notice your tardiness. Bankers do notice.
Face the situation by first facing your banker. Begin by making an appointment to work out a payment-rescheduling plan. When you tell your banker your troubles, don’t expect him or her to be shocked. Anyone who has been in the lending business longer than a month has most likely encountered businesses with repayment problems. Don’t be afraid to explain where you stand and to propose that you work out the problems together.
Step #2: Provide Up to Date Financial Statements
Before you propose a rescheduling agreement, however, put your financial documents in order. Before the banker can place any confidence in your ability to operate your business or follow a plan, you must demonstrate your ability to track your past performance.
When you submit the rescheduling proposal, your banker will want the same kind of financial information you provided for the initial loan.
The bank will assess your prospects to accomplish a turnaround within a reasonable amount of time. To make that assessment, your banker analyzes:
Start with an up-to-date income statement. Often referred to as a profit and loss (P&L) statement, the income statement reports the financial condition of your business over a period of time. It includes gross sales, all related expenses, and the resulting net profit (or loss) for the selected period.
The balance sheet, on the other hand, shows your company’s financial condition at a particular point in time. It lists what your company owns (assets) and what it owes (liabilities). The difference between assets and liabilities is the net worth, or equity, of your company. This is simply the money in the business that is not owed to anyone, representing the owner’s interest.
Be certain to calculate the key financial ratios of your business. The debt-to-worth ratio is the #1 measure of the financial strength of your business. Your current ratio measures the liquidity of your business (or your ability to pay your bills on time.) Pay particular attention to the trends of these ratios over the past couple of years.
Before meeting with your banker, be sure you know how your ratios compare to the benchmark numbers for your retail segment. (See The Retail Owners Institute website for benchmarks for over 50 retail segments.)
Step #3: Prepare Financial Projections
Because the income statement and balance sheet reflect your business’ history, you also will need to present your financial plans for the future.
Your banker will want to see pro forma (projected) income statements for the next 12 months. By using up-to-date information from your financial statement, you should be able to develop defensible projections. Remember, you must be able to substantiate your forecasts of sales, expenses and profit.
A sales plan analyzes you month-to-month sales trends from previous years and projects your expected sales results for the next year.
It is imperative for retailers to have a projected inventory buying (Open-to-Buy) plan, both to manage and control your inventory, and to produce a retail cash flow projection.
A cash flow budget (or plan) is your estimate of cash coming into the business, cash going out and your plans for the differences in months where you expect shortfalls or excesses.
Your integrated cash flow plan is vital because it shows the banker how you plan to handle your cash and whether or not another loan is necessary to cover future costs. Let your banker know your planned adjustments if your store’s performance falls short of projections.
Finally, be sure to calculate the ratios for your pro forma plans. What will your debt-to-worth ratio be? What will your current ratio be? Lenders - and vendors - make their decisions based on your financial strength and your ability to pay your bills on time.
Step #4: Show You Are In Control
Your strategy for controlling expenses will probably be the most important thing that you present to your banker. But you will also have to show that you have reviewed all aspects of your business relating to the flow of cash or other obligations.
Selling Expenses
Step #5: Develop A Plan – and Stick To It!
Once you have gotten this far, it’s easy to develop a plan. By following these steps, a plan will emerge allowing you to restructure your loan if needed. You will definitely now be able to show the bank that you can control your business’ future.
Your banker will want to receive monthly financial statements to compare your business’ performance with your projections. Bankers will prefer to see you meet the new schedule, but they must watch for danger signals indicating a need to plan for a sale, merger or liquidation of the business. The best way to allay your banker’s fears, of course, is to live up to your own expectations and meet your figures.
We hope you never need to reschedule a loan. But if you ever find yourself in financial trouble, or even just a bit off-course, it’s good to know your banker is on your side. Let him or her help you do more than just survive a difficult time. Together you can get your business back on track.
What can set you apart, however, is being pro-active about resolving the problem. Start now to address your situation. Manage the "lead time".
Here are the 5 key steps to follow, starting now!
- Call your Banker
- Provide up-to-date financial statements
- Prepare financial projections
- Show you are in control
- Develop a plan - and stick to it
Perhaps you are not down to the wire on your loan, but you foresee the potential for trouble. Don’t hope your banker won’t notice your tardiness. Bankers do notice.
Face the situation by first facing your banker. Begin by making an appointment to work out a payment-rescheduling plan. When you tell your banker your troubles, don’t expect him or her to be shocked. Anyone who has been in the lending business longer than a month has most likely encountered businesses with repayment problems. Don’t be afraid to explain where you stand and to propose that you work out the problems together.
Step #2: Provide Up to Date Financial Statements
Before you propose a rescheduling agreement, however, put your financial documents in order. Before the banker can place any confidence in your ability to operate your business or follow a plan, you must demonstrate your ability to track your past performance.
When you submit the rescheduling proposal, your banker will want the same kind of financial information you provided for the initial loan.
The bank will assess your prospects to accomplish a turnaround within a reasonable amount of time. To make that assessment, your banker analyzes:
- your ability to manage your business;
- your understanding of the market;
- ability to operate within a budget of sales, expenses and cash;
- and your personal financial position.
Start with an up-to-date income statement. Often referred to as a profit and loss (P&L) statement, the income statement reports the financial condition of your business over a period of time. It includes gross sales, all related expenses, and the resulting net profit (or loss) for the selected period.
The balance sheet, on the other hand, shows your company’s financial condition at a particular point in time. It lists what your company owns (assets) and what it owes (liabilities). The difference between assets and liabilities is the net worth, or equity, of your company. This is simply the money in the business that is not owed to anyone, representing the owner’s interest.
Be certain to calculate the key financial ratios of your business. The debt-to-worth ratio is the #1 measure of the financial strength of your business. Your current ratio measures the liquidity of your business (or your ability to pay your bills on time.) Pay particular attention to the trends of these ratios over the past couple of years.
Before meeting with your banker, be sure you know how your ratios compare to the benchmark numbers for your retail segment. (See The Retail Owners Institute website for benchmarks for over 50 retail segments.)
Step #3: Prepare Financial Projections
Because the income statement and balance sheet reflect your business’ history, you also will need to present your financial plans for the future.
Your banker will want to see pro forma (projected) income statements for the next 12 months. By using up-to-date information from your financial statement, you should be able to develop defensible projections. Remember, you must be able to substantiate your forecasts of sales, expenses and profit.
A sales plan analyzes you month-to-month sales trends from previous years and projects your expected sales results for the next year.
It is imperative for retailers to have a projected inventory buying (Open-to-Buy) plan, both to manage and control your inventory, and to produce a retail cash flow projection.
A cash flow budget (or plan) is your estimate of cash coming into the business, cash going out and your plans for the differences in months where you expect shortfalls or excesses.
Your integrated cash flow plan is vital because it shows the banker how you plan to handle your cash and whether or not another loan is necessary to cover future costs. Let your banker know your planned adjustments if your store’s performance falls short of projections.
Finally, be sure to calculate the ratios for your pro forma plans. What will your debt-to-worth ratio be? What will your current ratio be? Lenders - and vendors - make their decisions based on your financial strength and your ability to pay your bills on time.
Step #4: Show You Are In Control
Your strategy for controlling expenses will probably be the most important thing that you present to your banker. But you will also have to show that you have reviewed all aspects of your business relating to the flow of cash or other obligations.
Selling Expenses
- Analyze your current selling expenses (those directly attributable to selling your merchandise). Can you cut back on your sales force? What if you down-sized your staff, not by elimination, but by assigning dual jobs to key people?
- Can you curb advertising expenses? This is a time to really evaluate your advertising budget. Make sure advertising dollars are reflected by direct sales increases and that they are directed at your targeted customers.
- Think of ways to reduce all your expenses related to sales: supplies, travel and entertainment. Seek efficiency ideas from your staff.
- Administrative expenses may be easier to juggle. If administrative salaries are difficult to cut, things like office supplies, long distance telephone calls and expenses related to training can be re-evaluated. Do it.
- Rent is usually a hefty expense. It is also one that is difficult to change. Make sure you review all of your rental needs. Maybe you could do with less storage, or perhaps the storage area could be put to better use as a selling area. Know what your options are. Sometimes just making a change in your due date with your landlord can make a huge difference in your cash situation.
- Here is the Achilles heel of most retail businesses. Put into place immediately an inventory control system, and an Open-to-Buy (inventory buying) plan. You should have up-to-date inventory records that tell you how much cash is tied up in inventory and what merchandise is moving. Do you know your inventory turnover? Do you have a shrinkage problem?
- Get on the phone to the accounts that are past due. Often those same customers tie up your cash. Offer them a discount if they will pay by credit card. Then review your general practice of extending credit. Do you contact delinquent accounts regularly? Would a computer or the services of a collection agency help? Collecting credit is not something to be shy about.
- Do you need all the equipment you have? Learn to evaluate all of your current equipment needs (and future needs) based on a return on their investment.
- Here’s when it pays to know your suppliers. Check to see if you can arrange alternative payment plans if need be. Be sure to take advantage of early payment discounts, when appropriate. Right now might be the time to evaluate whether it is better to pay a modest penalty if it will help pass a tight spot.
Step #5: Develop A Plan – and Stick To It!
Once you have gotten this far, it’s easy to develop a plan. By following these steps, a plan will emerge allowing you to restructure your loan if needed. You will definitely now be able to show the bank that you can control your business’ future.
Your banker will want to receive monthly financial statements to compare your business’ performance with your projections. Bankers will prefer to see you meet the new schedule, but they must watch for danger signals indicating a need to plan for a sale, merger or liquidation of the business. The best way to allay your banker’s fears, of course, is to live up to your own expectations and meet your figures.
We hope you never need to reschedule a loan. But if you ever find yourself in financial trouble, or even just a bit off-course, it’s good to know your banker is on your side. Let him or her help you do more than just survive a difficult time. Together you can get your business back on track.
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