Communicating with Your Banker
Few relationships are as rife with mistrust as those typical of entrepreneurs and bankers. Most business owners believe that bankers cannot understand their financial realities. Not so, retort bankers: business owners are themselves out of touch with reality -- the reality of credit rules and banking regulations.
Given the contentious atmosphere, Jo Anne Schiller, the chief executive of Everyday Learning, a $7.2-million educational publisher based in Evanston, Ill., has done a remarkable job of cultivating her bankers. She had no choice, she says: "Our financial picture is very complicated because our business is seasonal: 85% of our orders come in from May to September. We couldn't survive without a bank line of credit, and we couldn't get that line until we found a banker who understood us."
Everyday Learning survived its first year, 1989, without credit, "but by our second year, it was clear that we needed to approach bankers," says Schiller. The company needed $500,000, but because Everyday Learning didn't have much of a credit record, bankers insisted that its borrowing be guaranteed by its venture investors. Schiller says, "I knew we needed to build credibility on our own. Our outside investors would not be willing to provide those guarantees for long."
Her strategy was simple: communicate. "Our bankers always wanted as much information as we could give them. But I think they were actually surprised by how much that turned out to be."
Schiller describes her annual banking forecasts as "full of excruciating detail. I do all my annual forecasts in sales units, translate those into dollar forecasts, and, at all steps along the way, spell out my forecasting assumptions." Each annual forecast includes both best- and worst-case projections. "I made the decision early on that I would hold nothing back."
Delivering both a high and a low forecast was unorthodox, but Schiller figured that her banker would do well to understand the range of possible business developments. "As a manager I make use of both sets of projections myself, so why couldn't my banker?"
Schiller's most recent annual forecast is about 12 pages long, with projections for her busy season. "As we enter that period, I watch the business closely to see how everything compares with my projections." In the rare case of unexpectedly low results, Schiller calls her bankers and schedules a meeting. "Try never to deliver bad news without having an explanation and a strategy for improving results," she recommends. "That helps your bankers stay confident."