The key element of working capital is cash, and if you don’t have enough to finance your operations, you will need a loan. Many entrepreneurial companies, indeed, establish ongoing relationships with a bank and get loans regularly. One of the benefits of learning the material presented in this book is that you will be able to talk your banker’s language. You’ll be able to present the banker with a detailed analysis of your company’s financial picture. You’ll be able to show exactly why a loan makes financial sense and how you will repay it. You’ll also be able to point out your financial strengths, identify your financial challenges, and discuss what you are planning to do about the latter.
When you apply for a loan, your banker will naturally want to see all the financial statements described in this book. In addition, he or she will probably want to see the following:
If you run into trouble along the way, don’t hide it from your banker. Your problems will probably come out at some point anyway, and bankers hate surprises. “When we started out, I always thought bankers were our enemy,” says Paul Saginaw, cofounder of Zingerman’s, the specialty food company in Ann Arbor, Michigan. “We didn’t want them knowing very much about what we were doing. But now I realize it’s important to establish a good relationship with your bankers, and the sooner the better. Invite them into your business. Have them look at your annual plans and your budgeting and your forecasting so that they have a feel for it. The more they know about you, the better the job they’re going to do when they bring your request to the loan committee.
“Besides,” Saginaw adds, “at some point you’re going to have tough times, and you’re going to need money to get through. So you want your bankers armed with all the information they can possibly get so that they can confidently defend your business.”
Want to manage accounts receivable more effectively? DSO is not the only measure to look at. Another is what’s called the aging of receivables. Often, reviewing aging is the key to understanding the true situation in your company’s receivables.
Here’s why. As we mentioned earlier, DSO is by definition an average. For example, if you have $100,000 in receivables that are under ten days and $100,000 that are more than ninety days, your overall DSO is about fifty days. That doesn’t sound too bad—but in fact, your company may be in substantial trouble because half of your customers don’t seem to be paying their bills. Another business of the same size might have a DSO figure of fifty days with only $25,000 over ninety days. That business isn’t in the same sort of trouble.
An aging analysis will present you with just these kinds of figures: total receivables under thirty days, total for thirty to sixty days, and so on. It’s usually worth checking out that analysis as well as your overall DSO number to get the full picture of your receivables.