NEW: Mr Banker

With a credit squeeze coming, managing your banking relationship might need some fancy footwork to present an alternative reality!

Managing your banker

Given yesterday’s talk of a credit squeeze, you may be interested in advice about managing your banking relationship, or more correctly, your banker.

It’s quite simple. Make sure that he or she believes that your business is going swimmingly well, and that if he or she doesn’t keep on their toes another lender will swoop and steal your business from them.

The first aspect is best explained with what management theorists describe as a “binary decision model” in which there are only two possible answers, and if one is true then other is not:

1: The business is going swimmingly well, in which case you should tell the truth to your banker; or

2: The business is not going swimmingly well, in which case you should not tell the truth to your banker.

Now, it is important to understand that the second alternative is not a suggestion that you should lie. I am firm in my view that one should avoid lying: I have enough difficulty in remembering things that are true without keeping account of all the lies I might otherwise be inclined to tell.

No, I suggest that you present your banker with an alternate truth – information that although irrelevant is certainly true. As most bankers have an almost irresistible urge to create graphs, the best path is to provide information that will show an increasing upwards trend.

But what information should you present? Well, here we can learn from the private equity chaps, who use the following (listed in order of desperation):

Earnings (net profit). Included only for completeness, because if you have these you may tell the truth.

Earnings before interest & tax (EBIT). This figure adds back your interest expense. Curiously, your banker will probably not be disturbed by the implicit assumption that his or her interest bill will not be paid. Note the artistic nod towards taxation, which implies that your business will somehow generate a profit and thus be required to pay taxes.

Earnings before interest, tax, depreciation & amortisation (EBITDA). This one adds back depreciation and amortisation, assuming that you won’t need to fund the purchase of new equipment (ironically, this is half-true because if you follow my advice, the bank will lend you money for that as well).

Earnings before interest, tax, depreciation & amortisation, and rent (EBITDAR). Excellent for retailers, this adds back the costs of rent. Note that it sounds exactly the same as EBITDA, which provides fertile grounds for confusion, especially if you read the figures to your banker by telephone rather than commit them to writing.

Earnings before interest, tax, depreciation & amortisation, research & development (EBITDARD). Much beloved by biotech companies, this one adds back the cost of research & development.

By the way, your banker may suggest that a retailer adding back rent or a bio-tech adding back R & D is incongruous. The correct response, which must be rendered word for word is “we have used those figures to facilitate benchmarking with our peer group” which neatly implies that there are many other businesses in a similar financial situation likewise not in receivership.

Some readers may find that even after all of these add-backs they remain unable to demonstrate a positive trend. Do not despair; in my next instalment I will detail more options but in the meantime, perhaps you could drop me a note so that I may short your stock.


Brendan Lewis from writes: And in these days of LBO madness, I am looking forward to seeing a bit of EBITRETARD, or Earnings Before Interest, Tax, Rent, Employee Termination Allowance, Research & Development.


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