Applying cash flow management strategies part 2 score 12-16-19 final

© 2004-2019 Priora® Cash Flow Management,
LLC All Rights Reserved
1
“Applying Cash Flow
Management
Strategies”
December 16, 2019
Session 2 of 2

2
Presented by
Tony Busch
Priora® Cash Flow Management, LLC
(920) 450-2840
tony@prioracfm.com

4
Part I
1. Profit vs Cash Flow – what really counts
2. Cash flow cycles
3. Key ratios
• Leverage Ratio
• Debt Service Coverage Ratio
• Working Capital Ratios
– Inventory Turnover
– Accounts Receivable turnover
– Accounts Payable turnover
4. Income Statement
5. Balance Sheet
6. Statement of Cash Flows
2-Parts: Applying Cash Flow Management Strategies

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2-Parts: Applying Cash Flow Management Strategies
Part II
1. Business Plan – complete with supporting written assumptions
2. Projections for next 12 months – Most likely, Best Case and Worst Case
3. Debt structure strategies
4. Loan documentation
5. Collateral coverages to be offered to lender
6. What lenders consider when granting business loans
• Character, Capacity Collateral
7. Criteria lenders use to evaluate a business loan request
• Quality, Income, Quantity
8. Presenting your loan request to the lender (up to 10 of them):
“I would like you to review my business plan and offer me a proposal
how to fund my business plan.”
Remember the WWW rule:
Who will do What, When
Ask for a timeline!!
8. Use your limbic brain as well as your neo-cortex
Watch Simon Sinek YouTube video,(Viewed over 47Million times)
https://www.ted.com/talks/simon_sinek_how_great_leaders_inspire_action?langu
age=en
It is titled, “How Great Leaders Inspire Action” Entrepreneurs must develop
leadership skills.

6
Quality assets
The higher the better for
both lender and borrower.
Minimum standard of acceptable asset performance
LEAVE
Sufficient quality, as measured by prudent lending practices, means the asset will remain above the
line. Standards by bank will vary.
Criteria lenders use to “measure” the quality of their assets (loans) includes the leverage ratio; the debt
service coverage ratio; the liquidity as measured by A/R, A/P and Inventory turnover ratios, and
the cash flow performance of the borrower.
Deterioration results in being below the line. If problems persist, the lender will ask the borrower to
leave the bank.
Borrowers need to understand how their daily business decisions impact the ratios lenders use to
measure the quality of their loan relationship. The best way for the borrower to apply these
principles is to prepare an effective cash flow budget and manage it at least monthly.
The higher above the red line the better the relationship for both the borrower and the lender because
the risk associated with that asset is less. And the more options the borrower will have from
lenders. Because competition increases the borrower can negotiate more successfully.

7
The Business Plan
Built for you!! Share it with the lender.
Five basic parts:
1. 80%-Cash Flow Projections supported with
written assumptions & Sources & Uses of
Funds and historical financial data.
2. 5%-Description of business
3. 5%-Description of management
4. 5%-Marketing plan
5. 5%-Executive Summary/Statement of need.
Update annually, and share with lender.

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Cash Flow Projections
When complete, develop three scenarios:
1. Most Likely case
2. Best Case
3. Worst Case
Share each of them with lender.
A negative “Cash Available Balance”
indicates how much the business needs to
borrow.

9
Priora Budget Planner

10
Monthly Cash Flow Ledger

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Assumptions

© 2004-2018 Priora® Cash Flow Management, LLC
All Rights Reserved
12

13
Debt Structures
Debt is the single biggest burden on cash flow:
Loans, accruals, accounts payable, taxes, etc.
Long term assets funded with long term debt:
Assets with a useful life over 12 months.
Short term assets funded with short term debt.
Assets with a useful life up to 12 months.
Always take the longest amortization available.
Have enough credit to provide adequate cash flow.
Lenders will not continue to fund negative cash
flow.

14
The “Real” Interest Cost
Daily interest rate factor. (Most banks use 360)
(360 day factor) $250,000 x 6% x 240 mos = $1,803.12*/mo
(365 day factor) $250,000 x 6% x 240 mos = $1,791.08*/mo
Difference $ 12.04/mo
x 240
*Subject to rounding differences Total overpaid $2,889.60
6% divided by 360 days = .01667% daily factor
6% divided by 365 days = .01644% daily factor
The “daily factor” is used for 365 days during the year.
SBA and consumer laws require use of a 365 daily factor.
You will only see this on the Note, after all negotiations.
This is negotiable. Banks do not have to use the 360
factor.

Debt Consolidation Strategies
15© 2004-2018 Priora® Cash Flow Management, LLC All Rights
Reserved

Calculating weighted averages
Weighted Average Interest Rate:
12,808/119,826 = .1069 x 6.13% = 0.6552
58,167/119,826 = .4585 x 6.39% = 3.1019
11,518/119,826 = .0961 x 13.68%= 1.3146
37,333/119,826 = .3116 x 10.14% = 3.1592
Weighted Average Rate = 8.2309%
Weighted Average Remaining Amortization:
14/163 = .0859 x 14 = 1.2026
61/163 = .3742 x 61 = 22.8282
48/163 = .2945 x 48 = 14.1350
40/163 = .2454 x 40 = 9.8160
Weighted Average Term Months (rounded) = 48.00
16© 2004-2018 Priora® Cash Flow Management, LLC
All Rights Reserved

17
No clowning around

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Basic Loan Documentation
Note:
– Binding – It is your promise repay according to its terms.
– Foundational document lays out terms of repayment
Security Agreement and UCC1:
– Places liens on assets to secure the repayment of the loan.
– Both documents needed to perfect the lender liens, placing their lien rights ahead
of unperfected lienholders.
– Pledging business assets can actually reduce personal liability.
Mortgage:
– Places perfected lien on real estate and fixtures assets.
– Priority is based on who is first to file the lien.
Personal Guaranty:
– Owners promise to repay if business cannot repay in full.
– Continuing, Joint and Several, and Unlimited.
Spousal Consent:
– Spouse surrenders equity in marital property assets.
– Does not require repayment of the debt, unless spouse guaranties

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Personal Guarantees
Owners promise to make lender whole if business fails and collateral is short.
Often not negotiable.
Lenders require personal guarantees for two reasons:
1. An alternate source of repayment of the remaining loan balances.
2. As an incentive for owner to work hard, not default on the loan.
3. If owner “don’t” lender “won’t.”
Can be secured or unsecured. Negotiable.
If more than one Guarantor, Guaranty will be:
1. Continuing – until all obligations at bank are repaid, not just this loan.
2. Unlimited – applies to all obligations at bank, not just this loan.
3. Joint & Several – bank my collect from any guarantor, without
liquidating collateral
Wisconsin Marital Property Law – spouse must sign Spousal Consent
This does not obligate spouse to repay debt, just lose interest in
personal assets as provided under Marital Property Law.
Any loans guaranteed should appear on Personal Financial Statement (PFS)
as contingent liability. Lenders watch for any contingent liabilities on PFS.

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Collateral Values
Collateral values determined by appraisal or
by receipts (equipment)
Loan-to-Value (LTV): Amount of loan as a
percentage of the value of the asset.
Real estate: ~80% LTV
Equipment ~50% LTV
Accounts Receivable ~80% LTV
Inventory ~50% LTV
Total equals amount of loan supported by
collateral values.

21
Collateral Values
Example:
Value1 LTV % Loan Amt.
Real estate: $400M 80% $320M
Equipment $180M 50%2 $ 90M
A/R $200M 75%3 $150M
Inventory $ 80M 50%4 $ 40M
Totals $860M 70%5 $600M
1. Value determined by balance sheet or appraisal. Depreciated assets are appraised.
2. Equipment LTV determined by age, useful life, market values per appraisal.
3. A/R LTV applies to A/R less than 60 – 90 days old, concentrations, A/P offsets.
4. Inventory LTV applies to raw and finished inventory. WIP no value.
5. Pooled collateral LTV.
Inventory & A/R are current assets for lines of credit.
Real Estate and Equipment assets for amortizing loans. Usually requires
appraisal to establish value.

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Shop Many Lenders
For new loans, shop other lenders.
New businesses, shop 10 lenders.
• Good practice
• Learn each time you present to lenders
• Build competition for your “asset” (star)
• Not all lenders may understand your business or
even want to lend to it.
The more options you have the better job you do
negotiating the terms of your loan.
The higher your ‘star’ the more options you will have. Your
presentation is directly related to the height of your star!!

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How to Choose the Right Lender
Use your limbic brain as well as your neo-cortex
Watch Simon Sinek YouTube video,(Viewed over 47Million
times)
https://www.ted.com/talks/simon_sinek_how_great_leade
rs_inspire_action?language=en
It is titled, “How Great Leaders Inspire Action” Entrepreneurs must develop
leadership skills.
“Manage Your Banking Relationship; Don’t
Be Managed By It®”
Listen for those lenders who demonstrate a
sincere interest in you and your success.
That is the type of lender partner you need.

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The Loan Presentation
Emotions, passion and facts. Limit emotions
During the meeting, this is what you say:
1.Thank you for agreeing to review my plan
2.I am shopping it with several lenders.
3.“I would like you to review my plan and
offer me a proposal on how you will fund my
business loan request.”
Then don’t say anything more until the
lender responds.

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The WWW Rule
Your job is to know “Who” is going to do
“What”, “When.”
Don’t forget the “When.”
Lenders are striving to determine, “If I
approve this loan request, how much risk is
there that the borrower will not be able to
repay the obligations owing under the
Note?”

26
Lenders evaluate Character Capacity Collateral
3 C’s of Credit (Capital and Conditions)
Character: drives all decisions in business.
Evaluates decision-maker.
Capacity: Is Cash Flow sufficient to repay all
obligations. First way to repay loans
Collateral: Second way to repay loans.
Not a desirable option for banks –
badwill. Plus, Personal Guaranty,
secured or unsecured.

27
Quality, Income, Quantity
Lenders must approve loans with these three
priorities, in this order!
Some lenders don’t follow the QIQ method:
GET OUT OF THERE – FAST!
Quality – Means the evaluation by the lender
concludes the borrower has the ability to pay all
obligations according to their terms.
Income – Means lender can earn a fair income
from the loan
Quantity – Means the lender does a lot of these
Quality/Income loans builds portfolio.

28
Business Loan Risk Rating
Lenders evaluate all the information they
receive from borrower, generating a Risk
Rating score.
1.Built on objectivity, not subjectivity. Facts
2.Risk rating vary from 1 to 7: Excellent,
Good, Acceptable, Watch, Substandard,
Doubtful and Loss.
3.Regulators review and critique processes
4.Lenders are lending depositor dollars.
5.Risk Rating evaluated regularly/yearly.

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Answer Lender Questions and Negotiate
Lenders are your partner – communicate
with them, proactively.
They are a source of vital information about
your industry. Listen!
Negotiate with them. Shop other lenders.
Always remain professional and courteous!

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Reasons Loans are Denied
• Poor cash flows result in insufficient debt
coverage ratio
• Lack experience in business.
• Poor trends in liquidity, leverage, debt
coverage.
• Lying, or, stretching the truth.

© 2004-2018 Priora® Cash Flow Management, LLC
All Rights Reserved
31
1. Cash flow is a symptom of how the business is
performing. Measure cash flow to find the causes.
2. Cash flow generates profits. Profits do not generate
cash flow.
3. Cash flow should repay debt; not the liquidation of
collateral.
4. If you don’t want to have problems with your cash flow,
you must pay attention to it daily.
5. Understand how your daily business decisions impact
the cash flow of your company.
6. Manage your banking relationship; don’t be managed
by it.
7. Debt structure can significantly impact cash flow
available to grow the company.
8. Remember what Dad used to tell you: “You get out of it
what you put into it.”
Priora® Pearls of Wisdom

32
No clowning around

33
Quality assets
The higher the better for
both lender and borrower.
Minimum standard of acceptable asset performance
LEAVE
Sufficient quality, as measured by prudent lending practices, means the asset will remain above the
line. Standards by bank will vary.
Criteria lenders use to “measure” the quality of their assets (loans) includes the leverage ratio; the debt
service coverage ratio; the liquidity as measured by A/R, A/P and Inventory turnover ratios, and
the cash flow performance of the borrower.
Deterioration results in being below the line. If problems persist, the lender will ask the borrower to
leave the bank.
Borrowers need to understand how their daily business decisions impact the ratios lenders use to
measure the quality of their loan relationship. The best way for the borrower to apply these
principles is to prepare an effective cash flow budget and manage it at least monthly.
The higher above the red line the better the relationship for both the borrower and the lender because
the risk associated with that asset is less. And the more options the borrower will have from
lenders. Competition increases.

35
Summary
Priora® Business.
“You can take it to the bank.”
Thank you for attending. I hope you
learned meaningful ways to understand
and manage your cash flow to improve
the performance of your business.

36
Thank You!
Tony Busch
Priora® Cash Flow Management, LLC
(920) 450-2840
tony@prioracfm.com

Applying cash flow management strategies part 2 score 12-16-19 final

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Applying cash flow management strategies part 2 score 12-16-19 final