The Banking Royal Commission has recently started taking submissions from Australian SME business owners and the tales of horror are very real for many families caught up in the grip of our major banks acting badly. The way our family business owners are treated by the major banks is nothing short of a disgrace. We have been working with a number of clients caught up with submissions to the Banking Royal Commission and have a detailed understanding of just what is going wrong with banking relationships in Australia.
SME Responsibility
Cash Forecasts
We will start with the SME business owners themselves. For many SMEs not understanding their own financial reports and cash forecasts is a fundamental starting point for the poor relationships with banks and financial institutions. It still surprises me to find in this era of “cloud based accounting software solutions” that for many SME business owners they either refuse or ignore the warning signs of not managing their cash flows accurately. If you are driving towards a cliff you should know about it, right! The simple answer is to invest a small amount of money and have accurate management reporting and cash forecasts each month.
Business Plans
If you want to run a successful business you must plan. No plan means planning to fail. It should start with a realistic budget or forecast for the financial accounting period. I say realistic because we see too many “hockey stick” revenue curves in Business Plans. There is no point in managing costs to an aggressive revenue forecast. It is too high risk and should you get approval for the required funding from your bank it is simply putting your business under stress, not to mention your staff and family involved within the business.
Experienced Staff
Nobody wants to hear bad news so the easy way out for some SME business owners is to hire incompetent staff who are told what to do and don’t ask questions. Our experience with financial staff is you get what you pay for. High quality staff who ask the right questions is mandatory in my opinion.
External Advice
For the smart SME business owners they want to be challenged with their decisions. We are increasingly seeing the best run SME businesses using mentors from the CEO down to give their business the greatest chance of success.
Bank Responsibility
Client Relationships
In many of our large banks there has been a complete layer of bank managers removed. These managers in the past had the time to visit the client, get to know the people and understand what made the client a successful business. Sadly those days are long gone and now all you have are relatively junior bank staff in regional centres trying their best to manage client relationships. I place the problem at the door of the Boards and CEO for destroying this essential part of the bank relationship with clients. In many instances and I have seen this with my own clients the person responsible for the client relationship has little understanding of the clients they are serving.
Banking by Numbers
In the absence of strong client relationships within the banks we have seen a rise in the power of the “back office” credit assessment teams. These staff never or rarely meet with clients and therefore rely on financial reports and computer programs designed to spit out a pass or fail mark for approval of bank facilities. More importantly these same “back office” teams can destroy a successful business because of what often are technical breaches of bank lending covenants. Many of the horror stories coming before the Banking Royal Commission started with “back office” banking by numbers.
Bank Incentives
For many bank executives they are very well paid by community standards. However this is often not enough and there is a tendency to allow a sense of ego, status, entitlement along with peer pressure to “screw” the client who has been deemed to have done “the wrong thing” with their bank facilities. The proportionality of financial punishment handed out to bank clients in this case simply reflects the imbalance of power in the bank client relationship and is one of the major reasons why the Australian banks are so disliked.
There is a better way to work SME bank relationships where there are two winners. If this blog has inspired you to consider using an experienced business advisor to help with your bank relationships we would love to talk with you about your bank facilities and how to get the best out of your bank relationships. Call me on 0401767639 or send an email to john@lindfieldpartners.com.au. Good luck with your banking relationships and hopefully we will not read about your business at the Banking Royal Commission.