Demonstrating your viable position is important when applying for that loan.
Securing a business loan can be daunting but one of the more important functions when needing capital for growth or survival. You must demonstrate to your lending institution that your business can generate a profit and have a positive cashflow. This requires substantiating your position with a series of reports including the preparation of a 3-Way Forecast and Key Financial Ratios.
Taking the time to prepare accurate budgets and forecasts is critical in being successful in any loan application. Going the next step by providing further analysis in the way of key financial ratios can only help improve your chances of getting over the line. Here are the relevant Key Financial Ratios you should include to help your Bank Manager make an informed decision. By using a reporting tool like Calxa you can bundle these all together into one report with a nice cover and some notes if you feel it necessary. But first let’s look at what you need to include.
Prepare a 3-Way Forecast
Banks want to see a 3-way forecast because a profit forecast alone is not enough. A true 3-way forecast includes Profit and Loss, Cashflow and Balance Sheet forecasts. Thankfully Calxa takes the headaches out of preparing all of these reports by taking your budgets and making all 3 reports work and balance together. Check out our help note Step-by-Step Cashflow Projections.
Key Financial Ratios
Three ratios are commonly used by bankers when assessing loan applications. It is important to understand these:
Debt Service Coverage Ratio
Why this is important?
This tells the banker how many times you could make the loan repayments with your net income. If the ratio is 10 or more, the banker will feel pretty comfortable. If it is just over 1 then they will be very nervous. Especially in the event of a profit downturn which could reduce your ability to repay the loan from your net profit.
This is not a default KPI in Calxa, but you can use the KPI customisation to easily create this ratio.
Why this is important?
This ratio is a way for the bank to determine how much of their money versus your own money is being used to grow the business.
This ratio is a standard ratio in Calxa, which we call the Debt to Equity Ratio.
Loan to Value Ratio
Why this is important?
In this ratio the banker is determining how much wiggle room they have in the event of the business defaulting on the loan. If the bank ends up with the collateral, they will want to make sure they can sell this for a value high enough to recover the outstanding loan balance. A value of 0.6 is a common ceiling for business borrowings (that represents $100 worth of collateral or security for $60 worth of borrowings).
Now to Polish Up the reports in Calxa
Now you can do all these calculations separately in a spreadsheet or you can add these KPIs to your Calxa reports. There are just a few simple steps.
First: Customise KPIs to Perform the Calculations
Whilst Calxa does come with 14 default KPIs commonly used in business, you can also create your own KPIs to provide further detail and insights into the financial information that is being presented.
When creating KPIs for specific purposes, it always pays to use a naming convention so that they are all grouped together in a logical sequence. By simply using a sequenced alphanumeric description they will appear in the preferred order on your reports.
In the case of the Leverage Ratio above, as mentioned earlier, this is a default KPI and is known as the Debt to Equity Ratio in Calxa. In this case, if you want this ratio to appear with the other banking ratios, simply create a new KPI with the new description and copy and paste the formula from the default KPI to your new customised KPI.
Second: Now add the Ratios to your Budget Reports
Once these KPIs have been created, they can be easily added to the bottom of your budget reports.
Both the Budget Summary and the Spreadsheet Profit and Loss Reports give you the option of including KPIs in the report criteria. In addition, these new customised Bank Ratios can be represented in graphical format by displaying the KPI Spreadsheet Chart.
Third: Bundling it all Together
Creating a Report Bundle for all of your loan application reports can not only save you time but help you deliver a professional loan application. When adding individual reports to the Bundle, you can rename the reports and give them a more relevant description and deliver them all at the click of a button.
Getting your Hands Dirty
For a comprehensive guide on preparing 3-Way Forecasts watch our Web Chat recording Web Chat: How to prepare 3-Way Forecasts.
So here you have it. A quick way of getting some meaningful financials to your Bank Manager. Impressed? Your Bank Manager will be.