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Nurturing Banking Relationships - Ratio Analysis

Furniture World Magazine


Looking at capital from the banker's viewpoint can make retail financing a lot easier.

It has been said that a banker is someone who lends you an umbrella when the sun is shining, and takes it away when it starts to rain. If that's true, then let's deal with the banker when the sun is shining.

Most of us have had to deal with bankers, and you may feel that your present relationship is a good one and secure, but things change - people, policy, regulations, etc. Like any good relationship, it must be maintained and nourished. Send your banker a printout of your PSI financial statement without him or her asking. Take them to lunch once a quarter, and keep them up to date. Your banker will enjoy hearing of your accomplishments.

Well, let's say your relationship isn't so good, or that bright young man that understood you and your business has just been promoted, and you're left with a stranger. Say you need some money for expansion, or a new store, or you plan to do $1 million more sales next year - you'll probably need $250,000 in additional inventory and receivables to finance it. If you don't believe it, take a look at your cash, inventory, and A/R as a percent of gross sales, and I'll bet you will be surprised how constant the percentage is from year to year (remember: you can "Grow Broke"). So, let's go to the bank, before you need it, and while the sun is shining.

Most bad experiences and loan turndowns are the result of poor education; the banker's lack of education about your business, and your lack of education about his procedures, policies, and constraints.

First, let's look at where banks are coming from. They are trained to require TWO sources of repayment. The primary source, cash flow for short term loans, and earnings for long term loans, should be backed up by some form of collateral (A/R, inventory, or a mortgage on fixed assets).

Then they will usually require a personal guarantee from the owner of the business. Blatant overkill, you say? Well, it's usually because they want your psychological commitment to the success of your business. The bankers don't want to take a chance on a loan if you are personally hesitant to do so.

  • Owners aren't prepared.
  • Not enough information.
  • Ask for money too often.


  • Bankers don't know the retail furniture business.
  • Revolving door. No personal relationships.
  • Can't make a decision.

There are some do's and don'ts listed on the facing page, that, when applied, will strengthen your banking relationship

Remember the old balance sheet: the healthier it is, the better chance you'll have.

In the final analysis, the most important aspect of dealing with your banker is establishing a relationship of trust and confidence. If you are well prepared and indicate that you really understand the financial aspects of your business, you should enjoy a very positive relationship with your banker.

Steps For Better Banking:

  • Make an appointment and allocate enough time.
  • Tell it straight, good and bad.
  • Be prepared.
  • Ask questions if you don't understand something.
  • Have a definite plan but be flexible.
  • Keep your banker informed.
  • Negotiate rates after you've presented the loan request.

Or Make It Worse...

  • Be impatient.
  • Make promises you can't keep.
  • Ask "how much" you can borrow.
  • Negotiate interest rates over the phone.
  • Spend the money before you ask for it.
  • Change banks solely for a better interest rate, unless your bank is not competitive.

Bankers' Favorite Ratios

Current Ratio = Current Assets/Current Liabilities

The Current Ratio measures how much money is available in current assets to pay current liabilities. That is assets due within one year and liabilities due in one year. The NHFA Furniture analysis has put the Average Current Ratio at 2.5; that is, you'd have $2.50 in Current Assets to pay each $1.00 in Current Liabilities

Quick Ratio = Cash + A/R + Marketable Securities/ Current Liabilities

This is a more stringent test for solvency and is a good indicator of liquidity, since inventory, and other current assets not readily available to pay current liabilities, are excluded from this ratio. Assuming good accounts receivable collection, a quick ratio of around 1.0 is usually adequate. That is you'd have $1.00 in Cash + Receivables + Short term securities to pay each dollar of Current Liabilities.

Safety or Debt to Equity Ratio = Total Liabilities/ Equity (or net worth)

Safety is defined as the ability of the firm to withstand adversity. It reflects the riskiness of the firm. The higher this ratio, the less safe (or more risky) the business is. This ratio is also referred to as the Debt to Equity Ratio. Bankers put a lot of stock in this ratio: Remember, bankers hate risk.

The Debt to Equity ratio is 0.9 for the safest firms, 2.0 for the average firms, and 3.2 for the riskiest firms. That is, the average firm has $2.00 in total debt for each dollar in net worth. The better firms have only 90 cents of total debt for every dollar.

Dell Van Orden has been the controller at Cain's Home Furnishings in Twin Falls Idaho since 1982, and CEO since 1993. Cain's is a full service, furniture, appliance and electronics retailer which will be observing its 50th anniversary in 1996. Questions about this article can be directed to FURNITURE WORLD at editorial@furninfo.com.