Wally Thomas

5 C’s of Banking – Passionate Relevance 

2016 is quickly coming to a close, as the calendar flips into the last 60 days, and agribusinesses and farmers alike continue to prepare for what is ahead in 2017.

Today’s agricultural economic environment certainly has created some headwinds that will challenge farmers and associated agribusinesses – including bankers, as adjustments are made to remain viable, competitive, financially strong, and vibrant for the future.

I recently had an opportunity to be a part of the instructor staff for the Center for Financial Training that led an Agriculture Banking School for Lenders. There were 38 bankers attending this school from across the United States. Dr. Paul Gorman, owner of Elcel Solutions in Mankato, Lewis C. Laderer, JR., J.D., an attorney from Indiana, and myself led these Agriculture Bankers through important banking topics over the 4 day long course. Topics included: Farm Tax Analysis and Interpretation, Risk Ratings, Commodity Futures & Options, Price Risk Management, and Loan Documentation. This in-depth training was designed to help bankers make good decisions in today’s market place, and help them do what bankers do every day, which is build relationships and manage risk.

Building relationships in banking involves both internal relationships with co-workers and external relationships with clients, vendors, regulators and others. Caring about getting relationship management right makes for solid banking.

Banking is also about managing risk – so important – because bankers handle other people’s money. Risk can be defined as the possibility of something bad or dangerous happening. In banking the types of risk that must be managed include credit, operations, reputation, legal, market and regulatory.

Banker/Client relationships are what drives successful partnerships between the bank and their clients – your business. Banks build successful relationships, and risk management strategies around the 5 C’s of Banking. These 5 C’s include: Capacity/Cash Flow, Collateral, Capital/Owner Equity, Conditions or environment your business is operating in, and Character – which includes the issue of people.

As it should be, most Agribusiness and Farmers want a great relationship with their bankers – AND bankers want great relationships with their clients. To help cultivate these relationships, communications by bankers to their clients as to the elements of the 5 C’s of Banking should be very transparent. Equally important is how bank clients communicate how their business strategies line up with the 5 C’s of Banking

This is the best time of the year (4th quarter of this year and 1st quarter of 2017) for bankers and their clients to work together to identify a proactive financial plan. Bankers and their clients need to listen to each other and understand the fundamentals that drive decisions for their banks risk management culture and successful continuations of business plans.

Here are a few pointers that will help drive good banker/client relationships:

  1. Articulate your goals to your banker in written form by identifying 1 year goals and 3-5 year goals
  2. Focus on the quality of your financial statements. These need to be transparent, including accurately valued assets & liabilities with full disclosure of capital leases and other off balance sheet items affecting your business.
  3. Develop a one page written plan of corrective actions that will improve negative margins.
  4. Make every attempt to develop a written projected cash flow, which can be 80 percent of a business plan, and utilize the projection to monitor business performance throughout the year.
  5. Know the key financial metrics of the business including underlying cost of production for each entity and/or enterprise. Communicate the key ratios utilized to assess the business, such as Debt/Equity, Working Capital, Current Ratios, Operating Efficiency Ratios and Debt Coverage Ratios.
  6. Maintain open dialogues. In difficult economic times there may be a tendency to avoid a negative situation. Honesty and transparency are powerful ways to demonstrate character and build trust.

In summary, sometimes when facing economic headwinds, as we have today in agriculture, your first step should be backwards. Bankers and their clients should take time to gain perspective on key basic elements of successful individual businesses. Once everyone on your team knows the basics for success, then move forward with incremental steps towards good relationships for successful and sustainable business performance.