Part of The manufacturing guide
The numbers your bank (and you) should see every month
Lenders don't just want year-end statements. They want monthly numbers, borrowing base reports and covenant calculations, and so should you. Here's what a good monthly reporting pack looks like for a manufacturer, and how to see a covenant problem coming.
Key takeaways
- A one-page monthly pack (margins, cash cycle, backlog, covenants) beats a stack of reports nobody reads
- Calculate your loan covenants every month, so a breach never arrives as a surprise
- Late or messy reporting costs you credibility with your lender, and sometimes borrowing room
For many manufacturers, the bank is a silent partner: an operating line backed by receivables and inventory, plus term loans on equipment. That partnership runs on reporting. Get it right and the bank extends credit when you need it. Get it wrong and every request becomes harder.
This article is part of our guide to the financial side of running a manufacturing business.
What lenders usually ask for
Read your loan agreement. Most commercial lending to manufacturers asks for some combination of:
- A monthly borrowing base report: aged receivables and an inventory listing, usually within 15 to 30 days of month-end. See cash flow and working capital.
- Quarterly or monthly internal financial statements
- Annual financial statements, within a set number of days after year-end
- A covenant compliance certificate, signed by the owner, showing the ratios the agreement requires
Missing a reporting deadline can be a default under the loan agreement, even if the business is doing well.
The covenants that matter most
Debt service coverage ratio (DSCR)
How many times your cash earnings cover your loan payments. A typical covenant requires at least 1.25.
DSCR = earnings before interest, taxes, depreciation and amortization (EBITDA) ÷ annual principal and interest payments
Example: a good year and a soft one
A Camrose manufacturer of steel buildings pays $38,000 a month in principal and interest on its term loans: $456,000 a year.
| Last year | This year (trailing 12 months) | |
|---|---|---|
| EBITDA | $720,000 | $540,000 |
| Debt service | $456,000 | $456,000 |
| DSCR | 1.58 ✔ | 1.18 ✘ (covenant 1.25) |
A slower spring and a big rework job pushed the ratio below the line. If the owner sees it in June, they can talk to the bank, show the order backlog and agree a waiver or a plan. If the bank sees it first, on the year-end statements in March, the conversation is much harder.
Current ratio and working capital
Current assets divided by current liabilities. A covenant of 1.25 or more is common. A classic way to break it by accident: paying for a new machine out of the operating line instead of a term loan. The machine is a long-term asset, but the debt is short-term, so the ratio drops overnight.
Debt to equity (or tangible net worth)
Watch these when you take large dividends or shareholder loan repayments out of the company. Money leaving the business reduces equity. See paying yourself and your family.
A one-page monthly pack
Owners need the same discipline as lenders, in a form they'll actually read. Ours fits on one page:
| Measure | Why it matters |
|---|---|
| Revenue vs same month last year | Trend, not just this month |
| Gross margin %, by product line | Where you make money (see job costing) |
| Quoted vs actual on closed jobs | Whether your quotes are right |
| Backlog (signed, unshipped orders) | What the next quarter looks like |
| Cash conversion cycle | How long cash is tied up |
| Aged receivables over 60 days | Who to call this week |
| Labour efficiency (job hours ÷ paid hours) | Idle time, rework, waiting |
| Covenant ratios | Room before a problem |
Make the numbers trustworthy
A report is only as good as the books under it. For lenders, three things matter most:
- A real month-end close. Inventory, work in progress, accruals and payroll properly cut off at month-end. See our month-end close for manufacturers.
- Inventory you can stand behind. Lenders discount inventory heavily when they don't trust the count. See inventory that matches your books.
- Consistency. The same accounts, the same methods, every month. Lenders notice when the gross margin jumps because something was reclassified.
The bottom line
Good reporting is how a manufacturer earns more credit, on better terms, when it needs it. If you'd like the monthly pack, borrowing base and covenant calculations prepared for you, see how we help manufacturers.
Sources
This article is general information, not advice for your situation. Rules and rates change, so talk to us before acting on it.