In commercial lending, we use the phrase “the story” quite a bit. Can an owner tell his or her story about the history, vision, and passion for the business? Can we clearly get a sense that the loan request matches what we hear? Finally, do the numbers tell the same story? This last question is the one that can be the biggest challenge for small business owners, particularly when the push and pull of daily operations leave little time for bookkeeping.
The two key reports for all sizes and categories of business are the Balance Sheet and the Income Statement (sometimes called the Profit & Loss or P&L). The Balance Sheet is an itemized list of the assets and liabilities of a business. It provides a snapshot of the financial health of a company as of the report date PLUS the historical earnings retained by the company. The Income Statement records revenue versus expenses and can be compared to the checkbook ledger for your family. It provides a snapshot of the current year’s operating health.
Some owners update these statements daily, other owners only update both statements once a year for tax purposes. While we can debate the timing of updates is based on the size and complexity of the business, having complete and accurate financials is an absolutely critical part of the business story. Being prepared and having accurate financials can mean the difference in approval when it comes time for a business loan or line of credit. Here are a few reasons why.
- Financial Transparency – Keeping complete and accurate financials and being able to produce them as part of the loan request tells your lender you’re prepared and willing to share and answer questions regarding your company’s operations. Financial statements should be easy to understand and be void of convoluted accounting or vague descriptions. Additionally, it helps investors and employees know where you stand.
- Builds Trust – When your numbers mirror the information shared in the discussions with your lender, it builds confidence that you understand where your business stands today in regards to assets and income. While questions are common from lenders or underwriters, they are typically to confirm what we’re seeing and shouldn’t involve chasing a rabbit down a hole.
- Presents the Cash Cycle for the Company – A complete and clear set of financials will show us how your business makes and spends money and when it needs financing or additional capital. Line items such as inventory, accounts receivable, accounts payable, current liabilities and others will allow us to see the sales cycle which aids us in assisting with loan structure, repayment, and collateral.
Away from the borrowing needs of the business, smart owners will use complete and accurate financials to identify trends or issues, make short and long-term planning decisions, and better prepare for tax season. Keeping clean financials will also keep owners out of trouble by spotting problems early.
If you’ve never really prepared an income statement or balance sheet, or if you’re ready to take a deeper dive into your company’s numbers with a CPA, the Eastern Shore Chamber’s member directory can be a great place to begin. Give me a call or shoot me an email and I’ll be happy to walk you through these and other key points to get you ready to approach your bank about your business lending needs.
By Greg Walker, VP Commercial Banker – Baldwin County
