The bank the business partner you can t do without

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1 The bank the business partner you can t do without Key people are always in demand to help in running a business. Ask any farm owner to list out the key people the look to in the running of the farm would probably result in a list containing- family, adviser, vet and the bank might just make the list. Many people find it hard to put a label on the bank they find it hard to decide are they an ally or the enemy. However for most progressive businesses the bank should be regarded as a significant ally in helping run the business from day to day and to assist in achieving the long-term plans for the business Banks essentially offer a range of money management services using various types of account facilities. They also offer to sell you a raw material or product in the form of money or finance which you can use to invest or meet the running costs of your business. In return the bank will look for payment for providing you with its products or services in the form of bank fees, charges and on borrowing they charge interest. How your bank can help you out Banks have two primary functions in assisting a business helping with money management and to provide finance should the business require it. The issuing of loans and other types of finance is the element that most people focus on since it usually involves the borrowing of a significant amount of money to fund a landmark investment in the business the buying of land or the financing of a new building, machine or additional livestock. While no doubt this particular bank function is significant, of equal importance is the role a bank plays in helping to manage the day-to-day dealings of the business which revolve around management of your current account, deposit accounts and short term borrowing facilities such as overdrafts, stocking loans and credit card accounts. The current account the basics The current account acts as the main point of contact between you, your business and the bank. The account has a fairly complete record of all the trading carried out by the business over time - how much money came in (usually income from sales or direct payments) and how much was paid out to meet the running costs of the business and to cover personal requirements for cash. Banks refer to the current account as the track record of a customer s dealings with them. More importantly the owner of the farm business can also make use of their own bank account data to help manage day-to-day cash flow and to keep a track on spending. The current account is truly the financial workhorse of the business. Receiving lodgements of cheques and cash, other electronic transfers-in of funds such as EU direct payments, clearing cheques drawn on the account to pay for inputs and services are all managed through the farm current account. The way current accounts are being used has been gradually changing over the years there are fewer and fewer dealings with cheques and cash and more movements of money using account-to-account electronic transfers. Banks are encouraging their customers are reducing their reliance on both cheques and especially cash to conduct their day-to-day business and they are

2 being encouraged to do so by changes in the charges for managing a current account. The traditional method of using a cashier in a bank branch to lodge cheque/ cash or to make a withdrawal is becoming more expensive as a result of higher transaction charges and less convenient due to lower availability of cashier staff at many branches. Farm business are increasing using modern forms of handing their money including direct debits, standing orders, on demand electronic transfers using mobile or internet banking, credit cards and debit cards. All of these methods of transferring funds usually cost less in bank charges and allow speedier movement of funds between accounts. Standing Order (SO) V Direct Debit (DD) what s the difference? A standing order is normally set up by the bank account holder to create a regular (for example every week or month) transfer of a fixed amount of money to another bank account. To set this up you need the bank account details of the receiving bank these details are the BIC (Bank Identifier Code) and IBAN (International Bank Account Number). Most online banking systems allow you to set up standing orders yourself which makes them a useful way to move money between your own accounts such as from your current account to a deposit account for regular savings. A direct debit is a request from another bank account requesting the transfer of a variable amount of money from the customer s account. It requires that the customer have pre authorised this transfer but rather than being initiated form the customer s account (as with a standing order) the order to transfer funds comes from the payee s account. It is usually a condition of the operation of direct debits that the organisation requesting the transfer must issue you with an invoice a number of weeks in advance of the direct debit calling for the money so that you have a chance to query the payment before it is made. The long term trends in the charges imposed on bank customers and also the taxes imposed by government on financial transactions are all encouraging less cash & cheque transactions and more electronic/ card transactions. From 1 st January 2016 there was a change in the charge for withdrawing cash from a hole-in-the-wall ATM whereby 12 cents stamp duty is levied on each use of a card to withdraw cash in this way subject to a maximum yearly charge of Electronic transfers usually still incur charges such as transaction charges, imposed by the bank and stamp duty charges such as the annual charge on the use of credit or debit cards. These stamp duty charges are much less in that there is usually just an annual charge for the use of a credit or debit card rather than the current stamp duty charge of 0.50 on each and every cheque. Many people still prefer the cheque as a method of payment as it allows them to record the details of the transaction on the cheque stub with the expectation that this will make it easier to categorise the expense for accounts purposes. Online transfers of money also allow you to add a message or further information to a transaction so that you can trace what it was for at a future date.

3 Become account vigilant With the potential for so many transactions to take place electronically, moving money in and out of your account it is more important than ever to monitor your business current account on a regular basis. Many businesses traditionally received a monthly bank statement although some banks incentivise customers to do without this paper statement and move to an electronic-statement service whereby the statement comes via or is made available for viewing on the banks on-line banking facility. It is a good idea to check in with your current account even more regularly that once a month just to ensure that you monitor the following What is your balance? Is it around what you would expect? Do you know what all the various transactions (transfers in and out) listed for the account were for? Can you see what future transfers are pending (due to happen in the next month) and will there be funds there to meet these? Most banks now have many options for you to keep tabs on your account. Online and mobile banking has improved a lot with screens that are easier to navigate around and provide a lot more options to use to help manage your accounts. You can group transactions together by category (using the description attached to the electronic transactions) and also search for a specific cheque by number or date. It is also possible to set up transfers of funds between your own accounts and to other accounts in Irish banks or to foreign bank accounts. All the main banks are encouraging greater use of their online systems so you should go online and check out what they have to offer. Apart from monitoring your current account it is also good practice to annually check the total debt the business owes to all the various financial institutions or merchants. A simple list of all the debts with the main terms and interest rates completed once a year can keep the business owner in tune with the main debt commitments and can focus the mind as regards how to manage the current debt as well as assisting in decisions around taking on additional debt to fund a new investment idea. Figure XX: A useful table to help monitor your debt

4 Golden rules of current account management The cornerstone of good current account management is taking care to not write cheques for amounts that exceed the account balance or not exceeding your maximum overdraft facility if an overdraft is in place. Regularly incurring referral fees due to unpaid direct debits or bounced cheques, where there are not enough funds in the account to meet these commitments, is seen as indicators of an inability to properly manage cash flow. Similarly not abiding by the bank s rules as regards using an overdraft by bringing the current account back into positive figures (into the black) for at least thirty days during the year is seen as a black mark on the current account track record. This situation can be often be avoided by keeping the overdraft facility exclusively for meeting short term demands for funds to meet the regular running costs of the business rather than spending it on large outlays particularly relating to spending on large sum investments such as buildings or machinery which usually don t generate income quick enough in the short term to recharge the account with funds. Apart from tarnishing your account management record any business that exceeds its overdraft can also end up paying very high interest rates due to the additional of surcharge interest levied on top of the overdraft interest rate. Preparing a loan application Another very useful support that banks offer is to assist businesses in financing significant investments. Banks provide funds upfront to invest in the business and then allow the borrower to pay the money back over a future set term. It is important to remember that this is a product that the bank tries to sell you with a price attached that is the interest charged. There is scope to negotiate around rates but the bank will work through a formula to set their rate after assessing the risk and the repayment capacity. Most banks price their interest rates based on a margin over the cost of funds i.e. what it costs them to borrow the money on the money markets. Generally the margin charged reflects the risk that the bank believes it is taking on by funding the investment. Calculating a borrower s repayment capacity is involves assessing the amount of free cash that the business has potentially available to make repayments on the new borrowings. The following formula gives an idea of how this repayment capacity is calculated in practice Plus Equals Calculating Repayment Capacity Net Profit (from accounts or eprofit Monitor) Non cash deductions (e.g. inventory change, depreciation charged) Living expenses (household running costs, pension and health insurance payments) Expected Income Tax to be paid Principal to be repaid on current loans (the interest fraction is already deducted in the calculation of net profit) Annual cash spend to fund small investments and other outlays Free Cash available to make repayments on new loans Apart from repayment capacity the bank will also look at your previous track record at managing your current account (as outlined earlier), the amount of your own funds you will contributing to the investment and the security you have available.

5 A detailed loan application form will supply the bank with much of the information they need but additional information can also be used to support an application. Banks are now routinely requesting three years of tax accounts, eprofit Monitor reports and ICBF reports if available to help give a picture of the farm financial and production characteristics. Projected cash flows for three to five years with a projected balance sheet for the same period can also be useful in demonstrating to the bank that the investment is going to have a positive effect on the financial status of the business over the term of the loan. The bank use these projections to satisfy itself that the loan can be repaid and the business can still meet its other obligations as regards operating costs over the term of the loan. Stress testing these cash flows by assessing the effect of higher interest rates and lower prices for sales product are also routinely carried out by the bank. For any business looking to avail of bank finance it is worthwhile to prepare well and have a clear idea of what the loan will be used for and what effect it will have on the business. Backing this up with well-prepared financial projections (cash flows) can greatly help in getting the best deal and best terms possible from the bank.