Standardization. Banks have standard forms for everything. Standard loan applications, standard personal financial statements, standard credit release forms, etc, etc. But for some strange reason, banks do not have a standard for financial projections. When it comes to financial projections, banks will accept just about anything. I have seen a projected income statement that shows expenses on top and revenue on the bottom, I have seen annual projections, monthly projections and even weekly projections, I have seen Excel templates with 50 or more tabs, and 1 tab Excel templates, I have seen projected balance sheets that don’t balance!
Why is this acceptable?
Why in such a standardized industry like banking, do bankers continue to put up with such a messy process when it comes to financial projections?
I think there are a few reasons:
Financial Projections are Just a Check-mark on the List – For the average business banker it can be like pulling teeth to get a loan applicant to put all of their documentation together, so once you finally have a set of financial projections in hand, the last thing you want to do is criticize them, you now have a full packet to send to underwriting, so just let them deal with it.
There is a Gap Between Sales and Underwriting – The previous point really represents the fact that there is a gap between sales and underwriting. Sales, aka the business banker, wants to get complete packets to send to underwriting. The underwriting team wants quality projections that they can analyze quickly and efficiently with their spreading software. Underwriters don’t want to have to go digging around for the numbers they need to produce for their spreading software.
Because Projections are Typically So Bad Lenders Don’t Give Them Any Weight – Finally, I think because projections are typically so far off, lenders don’t really care what they say, they don’t have time to educate the business owner on how to create realistic, data driven financial projections. So the easiest thing is to simply give the projections a 50% haircut right off top line revenue and see if they can still handle the debt service.
Despite these issues, there are several reasons why banks large and small should standardize the financial projection process.
Save time – I can not fathom how much time is wasted in underwriting departments around the world each year because there is no standard format for financial projections. Somewhere in a dark room there are underwriters clicking through 50 tab Excel templates looking for the numbers they need to enter into their spreading software or credit memo. If there was a standard format, underwriters could find those number immediately.
Make better comparisons between businesses – If you don’t have a standard format for financial projections how can you compare one business to another? How do you know whether the business owner “get’s it” or not. If you can’t complete a set of financial projections for your business, and you don’t have anyone else helping you that can, then you probably don’t deserve a loan. When you have a standard format, it will be much easier to compare a good set of forecasts to an unrealistic forecast.
Push their clients forward – Finally, lenders should be pushing their clients forward. Push them to grow, push them to imagine how to be more profitable and to plan their growth. If the business grows, so does their need for capital, their deposit base, and their need for other bank services.
So at ProjectionHub we are at the very beginning stages of determining how we can help banks benefit through the standardization of financial projections. We have a solid tool in place now, and we continue to iterate and improve. In Q1 2015 we will launch Version 2.0 of ProjectionHub which will support white label versions of the tool for banks to implement into their loan application process and customers will never have to leave the banks website.
We think there is an incredible opportunity for lenders to up their game when it comes to financial projections, and we want to be that gold standard for the future.