The Finance Cornerstone
By Mike Southon
One of the symptoms of a credit crunch moving seamlessly into a recession is the unfortunate chore of the entrepreneur spending more time with their bank manager.
This might well be to obtain more credit to cope with a short-term cash-flow problem, or to explain the restructuring required to take best advantage of unpredictable market conditions. Whatever the desired outcome, this is unlikely to be a meeting which either party regards with keen anticipation.
The challenge is that the entrepreneur and the bank manager speak two completely different languages. The entrepreneur likes to talk about new ideas and opportunities, about changing the world and making a difference and being recognised in the street. The bank manager is probably under strict instructions from above to reduce the risk in their portfolio of accounts, and can only express this in the language of the spreadsheet and the bottom line.
Meetings between entrepreneurs and banks managers can be tense and sometimes even characterised by strong language. Many years ago in my first start-up our CEO went to open a bank account. He was back very quickly and in a bad mood, so we realised the meeting had not gone well.
In his view, the bank manager was an idiot; he had not understood how clever our CEO was, how we clearly had an unbeatable business proposition and how much money we all were all going to make, including the bank.
Our CEO was ultimately right about this. We did indeed sell the company for a lot of money only five years later. But back on day one we had a small problem; we did not even have a bank account yet.
Understanding finance is one of the toughest challenges for an entrepreneur, especially if they come from a sales or technical background. It is a very large topic with constantly changing rules, and it was a real challenge for Chris West to summarise this into simple terms in Finance on a Beermat.
West worked with finance experts Stephen King and Jeff Macklin, and while there are indeed chapters on double-entry bookkeeping and tax, the book starts with simple and straightforward advice: before you do anything, you should find yourself a Finance Cornerstone.
This is very unlikely to be a full-time employee from day one; most people have a ‘virtual’ Finance Cornerstone, someone who comes perhaps one day a month and puts some order to your receipts and invoices in preparation for submitting your accounts.
But we make an important distinction between an accountant and a Finance Cornerstone. An accountant is essentially reactive; they will do your books and then tell you that you have gone broke. A Finance Cornerstone is pro-active; they tell you in advance that unless you do certain things, you will go broke at some time in the future.
Even if they only come in one day a month, they understand your business and can advise on how to scale up your business when times are good, and how to scale down your business when they are not.
Most importantly, they speak the language of the bank manager, and should always accompany you to any such meetings. The entrepreneur should make some introductory remarks, and then leave the running of the meeting to the Finance Cornerstone. In particular, any promises made about the provision of security or repayment of loans should be made by someone who not only understands the mindset of the bank manager, but who is also more likely to be trusted to keep those promises.
And if circumstances change and repayment terms need to be negotiated, this is best done by a professional, who will present a case that is based on facts rather than emotions. After all, the bank is in the business of lending money with interest, so as long as they think you will not let them down, they are more likely to be sympathetic to your cause.
In my first start-up we were lucky that another of our shareholders, the CEO’s brother, was a vice-president of Goldman Sachs, and thus able to smooth things over with the bank. If you are not in this happy situation, then I recommend one of the organisations that provide virtual Finance Cornerstones, such as the FD Centre www.thefdcentre.co.uk
Alternatively, you can even ask your bank manager to recommend someone. I am sure they will be delighted to help.
Finance on a Beermat by Chris West, Stephen King and Jeff Macklin is published by Random House Business Books
This article Copyright CMike Southon 2009 All Rights Reserved
Not to be reproduced without permission in writing
Originally published in The Financial Times
Mike Southon can be contacted at [email protected], www.beermat.biz