Edition 157 – Tectonic Shift
The findings of the Banking Royal Commission were handed down late on Monday afternoon and for every family business owner in Australia, there are significant, long lasting consequences that must be immediately addressed.
In short, I’ve identified twelve key issues that will impact family business as a result of the report. Whether you borrow money or not (and let’s face it, most of us do), what was announced on Monday is merely the start of a series of big changes that will impact not only the banking sector, but the business landscape as a whole. We are going to see some tectonic shifts over the next 12 months.
Here’s how I believe the Royal Commission’s finding will impact businesses:
- Borrowing will get tougher – if you borrow, the banks are going to make you jump more hurdles before they lend money. My guess is the property sector will be hit first, particularly as the banks are already warning of their exposure in a falling property market in Sydney and Melbourne.
- Covenants will be enforced – in the past, banks have not been that tough on enforcing loan covenants unless they are seriously exposed. They will ramp this up significantly as, the way I see it, they will look to reduce their overall exposure to businesses that not only default, but make missteps along the way.
- Poor financial performance will be penalised – higher interest rates will be imposed on loans where businesses are not meeting their financial targets. This is simply to price in the level of risk the bank will have to your family business. It’s also a warning sign they don’t love you as much as you thought.
- Underperforming loans will be pulled – every loan agreement, bar none, has the ability for the bank to pull the loan, for whatever reason, without much notice to you as the borrower. Banks want to reduce risk – which means pulling up stumps if there is bad light!
- Family Business Owners need to get more financially literate – at best, financial literacy amongst family business owners is barely passable. At worst, it is woeful. It is up to family business owners to make the time to review their financial reports, make sense of what they mean and seek expert help on the finance front.
- Family Business Owners need to know the Key Numbers in their business, daily – of the clients that I work with that take the time to provide me with a Highlights Report, we are able to drill down deeper than any financial reports can, to see what is happening in the business.
- Banks will want to see numbers more regularly – even a good risk can have times of the year where business performance isn’t so great – it’s called seasonality. Banks will want to know when they are exposed, what it means for them and what you’re doing to limit their exposure.
- Non financial indicators are going to be more important to the banks – loss of contracts, loss of key staff, the health of the owners of the business, product innovation – these are all aspects of your family business the banks are going to want to know about.
- Strategy is key – where are you taking the business, why are you taking it there, what will it generate in terms of results and what exposure does the bank have?
- Budgets will become critical in a family business – not just setting them, but monitoring them and recasting them if there are significant changes in the business. My best family business clients not only prepare them, but run their business to them.
- Cashflow forecasting will become critical in as much as if you don’t understand your own cash cycle, how do you know how much funding you will need from the bank?
- Chasing Debtors must ramp up – to reduce your exposure to higher borrowing (through overdrafts or invoice finance facilities) and the potential for loss.
This Week’s Tip
If you want to find out more, visit my website at www.deanrobinson.com.au and download a copy of my e-book – “How to make your Bank love your Family Business”.
Alternately, if you’d like a nice, shiny printed copy, email firstname.lastname@example.org I’ll post one out to you.