Don't BS Your Bank

A banker friend of mine called his client, an owner of a manufacturer near Fort Worth, Texas, and asked for next year’s projections by the end of the month. Good company. Good people. About $14 million in debt to the bank, spread across a term loan, a line of credit and some real estate.

My friend told me what happened next over coffee, and he still winced telling it. The owner did what some other owners do. He pulled up last year’s budget, added ten percent to the top line, divided it evenly across twelve months and hit send.

My friend had vouched for this owner internally. He had put his name on the relationship. And what came back looked like it was built by a second rate controller who couldn’t care less. When my friend’s boss saw the spreadsheet, he saw the BS pretty fast and asked for a meeting with the client by the end of the week.

Nobody at that table said the numbers were wrong. My friend’s boss said something worse. He said they didn’t believe the numbers.

Think about what the bank was looking at. Fourteen million dollars of its money was riding on that spreadsheet, and the spreadsheet had no story behind it.

Here is the truth: a budget is more than a forecast. It is a promise, and your bank grades you on how you keep it. A budget that misses by February, with no explanation, teaches your lender to doubt every number you send after that, including the true ones.

When a lender reads a manufacturer’s budget, he isn’t checking your arithmetic. He is testing three things.

One: what is already sold.

Start your revenue line with the backlog: orders in hand, contracts signed, work on the schedule. That is money with a date on it. Then put the pipeline underneath, labeled for what it is, which is hope.

Most budgets blend the two into one smooth line, and that is where belief dies. A banker can back a plan built on committed work with growth stacked on top. He can’t back a plan where a third of the year depends on orders nobody has signed. Keep them separate and be ready to defend each one differently, because he will question them differently.

Two: margin where it is actually made.

A blended gross margin is where weak product lines hide. One line earns 30%. Another loses money on every unit and plans to make it up on volume. The average looks fine. The average is a lie.

Build the budget by job and by product line, with the real costs included: labor, scrap, freight and the overtime you swear won’t happen. A banker believes a margin he can trace to a specific line of business. He has seen too many blended numbers to take yours on faith.

A revenue plan with no margin underneath it is, as we say in Texas, all hat and no cattle. It looks impressive from across the room. There is nothing under the hat.

Three: the cash the plan eats.

Growth burns cash before it returns any. You ship in March, you get paid in May, and the steel for that March order was bought in January. A budget can show a profit every single month and still put you on the phone with your banker in June, explaining why a line of credit ran dry in a record year.

So build a thirteen week cash flow forecast right beside the budget and make the two agree. If the budget says you grow 15% and the cash forecast says you run out of room in week nine, one of them is wrong, and it is not the cash forecast.

Then price your debt at today’s rates, not the rates you remember from four years ago. With a term loan, a line of credit and real estate on the books, the interest alone moves your numbers. Your banker already knows it.

Build it now, not in February.

Right now you can still change December. You can push a hire, renegotiate with a vendor or reprice a line that has been coasting. In February you are explaining, and explaining is a weaker position than planning. Many owners choose that position simply by waiting.

The owners who earn patience from their bank are not the ones with the prettiest budgets. They are the ones whose numbers still hold in March. When a quarter goes sideways, and a quarter always goes sideways, the banker who believed your plan gives you room. The one who didn’t gives you a deadline.

So before you send your next budget, ask three questions. Can I show what is already sold? Can I trace every margin to a real line of business? Does my cash forecast agree with my plan? If the answer to all three is yes, you have nothing to hide and nothing to dress up. Don’t BS your bank. Show them the real numbers, and they will work with you.