Financing: The KPIs to Share with Financial Partners

Nearly every company eventually needs outside financing if it is to grow. But it is no easy task to negotiate a bank loan, win over a financial partner or persuade a new shareholder to take a stake in the capital.

Financing negotiations will be more productive if you are prepared with the KPIs that your banker or your investors need to see. They will help them evaluate your track record and your ability to achieve your future objectives. n this article, we explain the Key Performance Indicators (KPIs) that you should share during financing negotiations.

Showcase your sound financial management and planning

Overall, you should present financial information that shows how you’ve performed in the past and a multi-year financing plan forecasting how you intend to operate in the future. This will provide prospective partners with evidence of your sound financial management, both in the past and looking ahead.

The plan should be succinct so that partners can understand your business and goals in a few minutes, but you should also include back-up information in case they want to know more on a specific point.

Tip: Be proactive by proposing an annual meeting to present your balance sheet, and/or suggesting regular meetings. The relationship of trust with your banker or your investors is fundamental.

Revenues, profit, cash flow, equity and debt are all specific quantitative indicators that must be provided to your talking partner. But you should also include a table containing forecasts for the company’s assets and liabilities. Your banker or potential investors need to assess how the KPIs have progressed in the past few quarters and how you anticipate they will change in the future.

The essential financial KPIs for negotiating a loan

The negotiation of a loan must include the following KPIs as well as any elements that will facilitate their interpretation:

1. Cash flow and liquidity

Cash flow and business liquidity ratios indicate your company's ability to meet its repayment schedules. The immediate cash flow (or liquidity) ratio should be greater than 1, which means that your company has sufficient cash to meet its short-term repayments. In the longer term, use the current ratio. Again, it should be greater than 1.

How to calculate the immediate cash ratio: Immediate cash ratio = cash/short-term debt

How to calculate the current ratio: General liquidity = current assets / current liabilities

2. Repayment capacity

The repayment capacity is obviously crucial: it allows you to anticipate your ability to repay a loan.

More than debt, your banker will be sensitive to your self-financing capacity since that indicates your company's capacity to generate resources solely through its activity, such as increasing sales.

How to calculate your repayment capacity: Repayment capacity of the company = net indebtedness / self-financing capacity

To get advice on how much to borrow to invest in and grow the business while controlling your overall level of debt, check out our article on the debt ratio.

3. Financial autonomy ratio

This ratio measures the proportion of internal financing in relation to total financing. It is calculated from the liabilities of the balance sheet.

This ratio must be higher than 0.2. Anything less means that your company is too dependent on external financing for its activities.

Lenders will be sensitive to your self-financing capacity since it indicates your company's capacity to generate resources independently through its activity – for example, by increasing sales.

How to calculate your financial autonomy ratio: Financial autonomy = equity / total balance sheet

Make sure your information is reliable and up-to-date. Remember: your credibility is at stake! So is your reputation. In addition to the numbers, any potential partner will also scrutinise the way in which you manage your staff and go about your day-to-day business.

Tip: Make sure you have home advantage! Try to meet at your company to showcase the atmosphere in your business and the commitment of your staff. These can be hard things to gauge, but they are vitally important and will inform the overall assessment of any potential financial partner.

For more tips and advice on business financial monitoring, download our ebook: Boost your financial performance analysis.

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