Don't Wear Your Rose-Colored Glasses to the Bank

When forecasting cash flow, it's best to take a conservative approach with lenders. Here's how to get the right message across to your banks, so you can get the financial assistance you need.

One of the most difficult financial tasks a rental store owner faces is trying to forecast cash flow for the business. When you're approaching your banker for financial assistance, you feel compelled, naturally, to describe how great everything is going to be. But most of the big banks and financial institutions that engage in construction equipment financing have hundreds, if not thousands, of rental stores for which they provide financing, and they know that the immediate future is not looking great.

The mistake most of our clients made in 2009 was forecasting that this recession was over. We are now having to go back to all of their financial institutions for a second round of financing restructure, and that second round is much more difficult to build ... and for the banks to accept.

(We do indicate now, very cautiously, that the depressed rental rates accompanying the economic downturn have reached the bottom, and that time utilization is growing slightly.)

When we present a financing package for one of our clients, we never show more than a 3% increase in annual revenue unless it can be unequivocally, without doubt, supported by a specific piece of business or contract.

Experience has shown that if you project an annual revenue in excess of 3%, the banks you depend on will not take your forecast - or your request - seriously.

Forecasting cash flow is a very difficult task, since there are so many variables - seasonality, sales of equipment, labor cost, to name a few.

In short, be very, very careful with your forecasting. Be realistic and prudent, objective and practical ... and save the rose-colored glasses for the Chicago Cubs and the World Series).

Questions or comments for Mike Farley? You can reach him at [email protected]