An Open Letter To Chief Credit Officers

Dear Chief Credit Officer:

An open letter to Chief Credit Officers.

If your objective is to protect your bank’s assets while providing credit to stable companies with positive cash flow, then making good lending decisions right now must be very difficult.

Certainly, your portfolio companies have cut direct costs and overhead to the bone. But how good are these owners at forecasting top line revenues?

These days, most owners aren’t sure. After all their cost cutting, a borrower’s unpredictable sales revenues could now have a greater impact on your credit risk than controlling his costs. While $1 of overhead reduction means a $1 drop to the bottom line, a $1 increase in sales only increases the bottom line by thirty cents or less. But since most companies are already operating on bare bones, a positive variation in that thirty percent can quickly lead to profitable growth and reduce your credit risk. Or send the customer into workout if revenues just don’t come in as promised.

So if predictable sales revenues are critical to your customers’ need for credit and the quality of the loans you can make, how can you help your customers better predict the revenues and profitability?

If your customers’ projections (and your loans) are still based on historical sales or industry ratios, are they real?  If not, are they too optimistic; too pessimistic?

In our post recession economy, changes in customers’ buying behaviour, on-line and off-line sales channels, and pricing are very likely. And these changes will mean your portfolio companies’ sales projections could be way off. Both over and under.

If you are interested in your portfolio companies taking a better approach to predicting profitable growth, here are three questions you can ask your borrowers:

1. Explain how your existing customers have changed their buying behavior and its impact on your firm’s profitability.
   
2. Describe how you intend to grow sales profitably without increasing your firm’s cost of goods sold or overhead.
   
3. How do you plan to use new sales and marketing channels to reach younger buyers and create new offers that appeal to buyers no longer willing to pay more for better service?

If your borrowers have logical, practical answers to these questions, lend them what they need because they have a handle on their predictable growth. If they don’t, question their revenue forecasts. Have  your borrower visit www.profitablegrowth.com for helpful tips on how they can get the answers you need.

PS. If you are a business owner, isn’t it a better idea to stay one step ahead of your banker. After all it’s your business, risk and profits!