What Your Banker Forgot To Tell You
When was the last time you checked on what services you're getting from your bank, what they cost, and how useful they are in running your business? One company's banking makeover
It all started on a tennis court.
Sam Kitchell, the founder and chairman of Kitchell Contractors Inc. of Arizona, a privately held construction company in Phoenix, learned from a tennis partner about a group of former bankers who had set up shop as consultants to the local business community. They had yet to see a company -- so they said -- whose banking costs were not excessively high, thanks to unnecessary services, overlapping accounts, or bank fees that were just too pricey.
Kitchell, convinced that his own company was doing a great job of managing its banking relationship, rose to the challenge. "Sam hired the ex-bankers mainly to prove that we were doing everything right," recalls Joe Quigley, Kitchell's vice-president of finance. He acknowledges, "I was also pretty skeptical about their ability to find anything to improve."
How wrong they were. One banking makeover and $20,000 in saved costs and increased income later, Kitchell's managers have learned an important lesson: You have to plan, monitor, and control your banking relationships with the same rigor and commitment you apply to the rest of your operations. When those relationships are mismanaged or unmanaged, the consequences to your cash flow can be damaging -- both in unnecessary costs and in inefficiencies in the movement of working capital.
What kinds of companies are most vulnerable on the banking front? Size has little to do with it (although the smaller your financial resources, the less likely you are to monitor your bank services regularly).
You are most vulnerable, whether you are small or large, if you are growing rapidly. You tend to sign up for new banking services or accounts as additional sources of revenue develop, but seldom step back to analyze the overall cost and value of each piece of your banking network. The unnecessary costs accumulate and are, of course, irrecoverable.
The odds are pretty strong that you could benefit from a bank checkup every two years if your company is growing rapidly, is more than a few years old, or currently operates more than a few bank accounts. You need to answer such questions as these:
Does every one of your bank accounts generate a value that justifies the fees you pay?
Are you paying for unnecessary or outmoded reports and services?
Do company funds flow as efficiently as possible among accounts, or can you streamline the process?
The checkup that $100-million Kitchell Contractors performed on its dozen or so bank accounts last year offers a useful guide for other growth- company managers. The results were impressive: Starting out with annual bank service charges of $30,000 to $33,000, Kitchell cut its costs by about $13,000 and generated additional income of about $7,000. Best of all, though Kitchell got help from the ex-bankers, everything it did can be handled internally -- with a little time and legwork -- by most growing companies.* * *
Step One: Collect detailed bank records going back at least one year. Before Kitchell's bank checkup, Quigley says, he had always been satisfied with just "looking at our bank statements each month to check bottom-line costs and making certain we kept enough on deposit to save any service fees." He shared daily banking responsibilities, such as the handling of accounts payable and receivable, with two financial clerks. "None of us had any special training in banking," he notes.
But Quigley learned that to truly evaluate Kitchell's banking costs, he needed to analyze longer-term trends and also to compare monthly bills. Under the direction of Dennis Suchocki, president of BCS & Associates, the former bankers' consulting firm, Quigley collected the construction company's banking records -- which included balance reconciliations, monthly statements, and credit-card statements -- for the entire previous year.
Or at least, he tried. "Some monthly records were missing from Kitchell's files, and others were not as comprehensive as we needed them to be," Suchocki says.
Quigley hadn't realized that banks offer an alternative to the brief monthly statements he received. "Most banks send out consolidated, as opposed to detailed, bank statements to their corporate customers," Suchocki explains. "We tell people to look at their bank statements as if they were invoices and to request a complete breakdown of every single bank service they're receiving." Once you have those records, you can begin to analyze monthly trends and determine whether each account and service is really worth paying for.
Lesson: Request comprehensive monthly bank statements, going back at least one year. If your bank won't provide those (or charges exorbitant fees for the information), you may want to examine your entire relationship to be sure you're doing business with the bank that is the best for your company.
Beginner's tip: Don't be intimidated if you don't understand the banking jargon on your bill. It's simple to read once you learn the terminology. For a quick translation, either ask your banker or invest $9.95 in a useful resource prepared by BCS's ex-bankers, Banking Smarter: How to Save Money in Your Business Banking Relationship (to order, call 800-644-8384).* * *
Step two: Map out each account and the services it provides. "The biggest thing we learned from our checkup," Quigley says, "was that when you initially set up your bank accounts, your plan makes sense -- at least on the day you do it. But as your company grows and changes, some accounts and services stop making sense and you don't even know it."
Case in point: The checkup revealed that Kitchell's banking network had evolved, willy-nilly, into a system in which funds were transferred from one account into a second and then into a third from which check payments were disbursed. "Seeing everything mapped out helped me realize that there wasn't any need for that middle account, no matter what the original justification for it was," says Quigley.
He couldn't blame Bank One Arizona, Kitchell's banker for the past four years, for the account overload. After all, it, like all banks, is in the business of selling its services. The problem was that no one -- either at the bank or at Kitchell -- was monitoring account-usage patterns.
And the list went on. "There was also an account that was being charged a maintenance fee to receive wire transfers, even though we could tell -- by looking back over the past year's transaction patterns -- that wire transfers were no longer being made," Suchocki says. Another account to close.
Kitchell cut its annual banking costs by $2,000 just by closing unnecessary accounts, bringing its current number below 10.
Lesson: It's deceptively easy for overlapping and unnecessary services to creep into your banking network unless you remain on the lookout for excesses.
Beginner's tip: Even if your company has only a couple of different accounts, you may find yourself paying for unnecessary services as your business grows and changes. To avoid excessive costs, list every single service provided by each one of your accounts and make certain your company actually requires it in order to do business.* * *
Step three: Question the benefit of each account reconcilement and disbursement service. When you sign up for a new depository account, all kinds of services seem necessary -- even when they're not. Quigley and Suchocki found that Kitchell was paying for an account reconcilement report on one account that had such a small volume of checks that the company could have handled the task internally. Then there was another account that typically maintained a zero balance and yet still received a balance report each month. The report just kept saying zero.
"Because nobody had really monitored the accounts, no one had questioned the importance of any of their reports and services," Suchocki says. When those and other services were eliminated, the savings were estimated at up to $8,000 annually.
Lesson: To evaluate the importance of different checking-account services, analyze check-deposit patterns over a period of several months.
Beginner's tip: When your company is small or starting out, its safest bet is to sign up for as few depository services as necessary. If account activity later increases to the point where reconcilement, balance reporting, or disbursement controls make sense, you can always add the needed service then.* * *
Step four: Aggressively look for ways to cut costs. Here's the kind of secret that only a banker (or a former banker) can tell you. "Every bank charges its customers a fee that basically covers its share of FDIC insurance. But banks calculate those fees in different ways, and if you learn your bank's method, you may be able to take steps to reduce your costs," Suchocki says.
First learn how your FDIC fees are calculated: they might be tied to your company's average available balance over the course of a month or its balance on the last working day of the quarter or of the month. "If you know when the fee is assessed, you can reduce your cash balances to the minimum amount you need to keep checks from bouncing," Suchocki advises. "Invest the excess cash in a 24-hour instrument and return it to your account the day after FDIC charges are assessed."
There's nothing illegal or difficult about that type of cash-management technique, and it saved Kitchell Contractors about $3,000 a year.
Lesson: Look for ways to reduce your own FDIC insurance costs. (If your bank's FDIC assessment is tied to your monthly average account balance, juggling funds around won't do -- you'll have to decide whether you want to maintain a skimpy balance throughout the month.)
Beginner's tip: Don't assume FDIC savings are available only to cash-rich companies. So long as your company maintains cash balances to cover its payroll and accounts payable, you stand to benefit from lowering your FDIC costs.* * *
Step five: Put total service fees into perspective. Before Kitchell's banking checkup, Quigley had prided himself on keeping large cash balances on deposit. "We didn't have to pay any service fees, so long as we kept big enough balances in reserve."
But that can be a costly mistake. "Once you're certain that you've taken reasonable steps to eliminate unnecessary fees and cut back on others," Suchocki says, "you'll probably be better off maintaining minimum account balances and then paying your bank fees outright." He adds, "Companies usually can earn much more by investing excess funds than they can save by avoiding bank fees."
Quigley estimates that this strategy has increased Kitchell's income by about $7,000 per year. "We now take a payout of excess cash each day and invest it in a range of options -- our investment account, bank repurchase agreements, and the like."
Lesson: Companies that generate significant amounts of excess cash, even if only on a seasonal basis, should look for an investment adviser who can help them manage treasury, equity, or other investments (unless they're large enough to employ an investment-oriented chief financial officer).
Beginner's tip: If your company lacks the internal financial expertise for active cash management and can't afford to hire a broker, then at least set up a sweep account. For fees of $50 to $100 monthly, it will invest each day's excess funds in a money-market account.* * *
Step six: Schedule follow-up checkups. Having been through the process once, Quigley says he's "learned how ignorant we really were about banking. Now we're determined to take control of the relationship and make sure we receive and pay for only the services we need."
Lesson: If your banker objects to your company's checkups or tries to discourage you from cutting back on excessive services and fees, that may be symptomatic of other problems with the bank. A good bank will be comfortable with a company's efforts to streamline its accounts.
Beginner's tip: If your banker objects to the streamlining, and your banking options are limited because the only way you'll get a credit line is to bring all your business to one local bank, then your only means of keeping costs down is by eliminating as many services as you can.
FOUR BANKING MYTHS
Don't believe everything your banker tells you. Here are four myths that may keep your banking costs unnecessarily high:
1. The more services and accounts, the better. "Compare your company's banking network to your family's," advises ex-banker Dennis Suchocki. "You wouldn't set up one account to pay the mortgage and another to pay the electric bill with." Companies can manage much of their banking affairs a lot more cost-effectively with just a few well-coordinated accounts.
2. You're better off receiving every banking report you can. Not so, notes Joe Quigley, vice-president of finance at Kitchell Contractors. "We used to get one report detailing our paid checks in addition to our monthly statement, which gave us the same information. And we were charged for both."
3. All fees are the same. In fact, most accounts assess both maintenance fees and item fees. Here's the difference: maintenance fees are basically a monthly service charge that is assessed whether or not you actually use the account; item fees are levied on each transaction that occurs within the account, such as handling a cashier's check or wire transfer. Once you understand your account's usage pattern, you may be able to negotiate for lower or waived fees on certain transactions if they're either unusually high or unusually low, or to close accounts altogether if their usage levels fail to justify maintenance fees.
4. You have to switch banks to lower costs. That's usually not the case, as Kitchell's experience proved. "Growth companies usually wind up banking wherever they can get the best credit arrangement, so they can't aggressively shop around for the best fee structure," says Suchocki. "What they can do instead is aggressively analyze existing banking patterns."
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