Financial Modelling – Why Banks Love It. 

“If people understood how beneficial financial modelling is, they would definitely want one built for their business.”

As Neil Parker (MD BridgePoint Group) mentions in the opening statement, if you know what it is, then you’ll want it for your business.
 

You can read here where we dived into the benefits of financial modelling and how it can help you, as a business owner, to make the right decisions at the right time. A further area to consider is how effective financial modelling is if you ever have to deal with banks as explained below. 

Whenever you borrow money from a bank it comes with covenants.

These are certain measurements that you need to meet every year. If you are not mindful of those things and you breach one of those covenants, then you are immediately in trouble with the bank. Working with a forward set of eyes, such as a financial model, you can see in advance if you are in any danger of breaching your bank covenants. 

If you are looking at a likely breach, you need to jump on the front foot immediately and renegotiate those covenants. You see, those set covenants are set based on what you told the bank at the time that you borrowed money. But things change and right now, we know that things are indeed changing!

So, it’s very pertinent to know what your covenants are, how your business is going to cope with adhering to those covenants and at what point you need to engage your banker about what’s going on with the business. It bears asking, how confident are you in meeting those commitments? 

You Do Not Want to Breach Your Bank Covenants. 

It’s a very slippery slope from there. The lender can send you to ‘bad bank’ and that department essentially works out how they best exit that loan. For the lender, it is all about minimising losses. The trouble that happens is if you breach a covenant and get sent to ‘bad bank’, that rating follows you from institution to institution. Good luck trying to convince any of the main financial institutions to lend you money. In a worst case scenario, if you can’t meet the bank’s demands they will call in a receiver and your business could end up with the liquidator.

Alternatively 

When you are able to see a breach on the horizon or if you are on the cusp of breaching your covenants, then contacting the bank is crucial. If the bank sees you have some financial modelling available to analyse and you have some decision-making options, that is seen in a very positive light. They will consider your request to vary covenants, whether temporarily or for the life of the loan.

From a banker’s perspective they want the loan to run its term, they only make money when they lend. So, if you can show them that that’s viable, albeit with variations to the covenants, they are likely to be listening. 

If you’re not convinced of the benefits of financial modelling then take it from us, it works. We use it in our business and we wouldn’t be without it.

“The business manager that does engage in financial modelling suddenly sees the light! It is like driving with headlights on low-beam and you hit the high-beam and there’s a lot more clarity. Financial modelling simply allows for business decisions to be factual based and outputs measured and results collated.” Neil Parker BridgePoint Group MD.

If you would like assistance in getting some financial modelling for your business, or to find out more about the benefits of financial modelling for your business, please contact us.

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Mitchell Turnbull

DIRECTOR

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