Guy Gaffney, Vice President of Credit at Los Alamos National Bank; Article by Damon Scott

Business owners and entrepreneurs get excited about their product and the market they serve. But to achieve long-term success, sooner or later they have to focus on a different critical area: their business finances.

Even when grants, initial sales or investments from family and friends have funded an idea from product development to market, most businesses will need financing in order to grow. If cash has been exhausted, the company’s financial position will be strained and its funding opportunities limited.

Guy Gaffney, vice president of credit at Los Alamos National Bank, has seen this situation many times during a decade with the bank. He encourages business owners to start the loan application process while they still have enough working capital to qualify for a loan. But just as important as cash, he said, is that the owner become financially literate.

Business owners spend a lot of time on the sexier aspects of the business, said Gaffney. They know their customers and have stellar marketing plans, but they haven’t invested in the financial knowledge that will help them guide the business.

Gaffney said businesses can get in trouble even when revenue goes up, especially during periods of rapid growth. Increased expenses might not show up right away, that the company could be at risk due to insufficient cash flow.

“Take inventory,” he said. “You’re building a tangible product and you buy materials first that customers will buy later. Your income statement may show a net profit, but all of your cash is actually tied up in the inventory. Net profit is an important metric, but not the only metric.”

For those whose financial knowledge is lacking, Gaffney recommends workshops given by nonprofit business resource groups such as WESST, SCORE and the New Mexico Small Business Development Center network. He often partners with the SBDC to help business owners understand their financial reports.

“We don’t expect you to be Warren Buffett, but you should be conversant [in financials],” he said. That means understanding balance sheets, income statements and how cash flows through the business. For a banker, it’s all about the borrower’s ability to pay back the loan, he said.

Banks also evaluate non-financial aspects of a business when considering a loan request. “A big part of lending is an assessment of the management of the company,” Gaffney said, “whether it’s just you or a team of people.” Bankers look for character and fortitude that will see a business through the most difficult times.

Gaffney suggests picking a bank that’s respected and will make a good partner. “Start with a checking account and build a relationship,” he said. “Use your banker as a financial advisor even before you need a loan.” Small $5,000 or $10,000 loans will also build credit and demonstrate that the borrower can manage his finances well.

“Financials are like your business’s scorecard,” Gaffney said. The most successful businesses keep score.

Visit LANB to learn more. Reach Gaffney and the LANB commercial lending team at 505-661-2240.

Finance New Mexico article 573 by Damon Scott