Good Bank Bad Bank

Posted by Dave on November 15, 2013  /   Posted in Work Smarter


Not sure if any bankers have heard themselves referred to like this but within business circles those terms are notorious indicators of the buoyancy of the business.

If the business is doing well then the account management from within the Bank is all peaches and cream. When you’re in this place you can do no wrong and the Bank’s (plural) are over you like a rash. The corporate seats to the Rugby or cricket, ballet or Opera will be pouring through the door from the bankers wooing them like the latest super-model. This is pretty much the space where those within Xero reside right now, I suspect. The banks will be busting down their doors to service them.

…. However, I suspect a dark day is looming and the company with the soaring share price but dismal financial performance is going to come crashing to the ground. A bit like a dot-com bubble burst I suspect. Only my opinion though.

What happens then? Well Bad Bank comes knocking. The Bank wheel in the heavy hitters from the Credit Management Team and they have authority to get your attention. A bit of a dramatic scenario but none the less it has happened to a lot of businesses, some who have recovered from a momentary blip and others who have spiralled so far down never to be seen or heard from again.


What are the metrics to watch – DAILY!!!

Working capital is a fun term but something a number of senior executives I have worked with have no idea of its meaning. And I suppose if you’ve grown up in Marketing or Engineering it’s not something that you had to pay much attention to. That’s the domain of the accountants – let them look after the numbers, that’s what floats their boats. But once you’ve aspired to a senior level you need to know about working capital. It’s a fundamental business driver.

I was in a meeting with Bad Bank and the Owner of a business a few years ago and the Bad Bank was laying down the future in no uncertain terms and told the Owner that the Bank could no longer support the business working capital requirements any further. After the Owner shook off his glazed-over expression he proceeded to advise the Bad Bank team about his expansion plans for breaking into a new export market. Wrought-iron hang-glider stuff. You see, he heard what the bank was saying but had nil comprehension.

Ok, what are the things you need to look for?

CASH – if you’ve heard it once you’ve heard it a million times CASH IS KING.

So how is your bank account looking? Do you have a cash-flow forecast? Is it annual, monthly, weekly or daily? In some businesses I have been in, the timing of cash-flows in and out was so critical to the short term survival that we had to know exactly what our cash-flow movements were going to be. Do you know? It’s not pleasant phoning the bank for approval to pay wages.

Debtor aging

What is the aging profile of the money your customers owe you? If the debt is skewed to more old-outstanding than current, then you have a problem. You need to focus on getting debt in. There comes a time when you have to make a hard call on a customer and become a bit hard-nosed about what they owe you. My perspective on this is a bit simple: if your customer cannot acknowledge your need to make a profit then they are disrespecting your business, therefore it might be time to terminate the relationship. Too often businesses spend energy and resource on customers who are not really worth the effort. Of course I understand the business requires customers to exist (unless it’s an SOE). It comes down to the Pareto 80/20 rule.  A simple metric I like to employ is this:

Current 30 days 60 days +90 days
Month 1





Month 2





Month 3





Track the effort over a time period and see how your efforts are being rewarded. If it’s taking too long then increase the effort.

As the old management idiom goes “you manage what you measure”.

Creditor aging

As with Debtor aging, you need to manage in the same but opposite way how you pay your suppliers. It’s very noble wanting to pay your suppliers by the 20th of the month but the reality is these days you’d possibly be the only one doing it. Terms of trade “20th of the month following” now has custom and practice to mean the end of the month. If you’re paying your suppliers before your customers pay you then you need to change tack very quickly. You’re in a cash-negative situation.

In one company a particularly large customer paid us on invoice 60 days following. We had to negotiate with our suppliers the same terms. Either they had to oblige or we had to find a new source of supply. It becomes a vicious circle but you have to focus on the survival of your business.


Oh yes, how much stuff do you have sitting on the shelf or uncompleted work-in-progress? This is closely linked to both Creditors and Debtors. Your debtors might be holding up paying you because they are waiting on something else to be supplied or completed. Likewise if you owe buckets to your suppliers, is it because you have too much on your shelves or because you are not churning the work fast enough?


Cash still is the metric

Cash is the lifeblood of any business and the laws of economics tell us the support you get will only be as good as the fundamentals of the business that the stakeholders see and believe.  The risk profile you hold will determine the extent of the investment you would make in any enterprise, and for me, the Xero business serves as a prime example of how risk adverse I see myself. I would need a fair amount of convincing that an investment at $41.00 per share is a wise investment for a business that is not managing to hold on to any of the cash they generate. The operating costs are a 1.32:1 against revenue. For every $1.00 of revenue they generated they spent $1.32 – how does that sit with Good Bank Bad Bank? Could your business function on that metric?

Comments are closed.

^ Back to Top