Your business accounts may not be a very sexy subject … at least when you are up to your ears in running, managing and problem-solving … but a poor set of out-dated accounts will really hold you back, when you need to borrow, and the bank manager is asking for current accounts, cash-flows and projections.
The banks had a hell of a fright with the ‘Credit Crunch’ and are so much more demanding. They insist you have current information for them to assess, before lending money, or extending an overdraft. Typically they want to see:
- Recent financials
- Copies of business contracts
- Any information supporting future income projections
Gone are the days when the last couple of tax returns would suffice to get a business loan.
In years past, accounts may have mostly been prepared for tax purposes. As a business owner, you may have felt you had a good enough handle on how the business was going throughout the year, without the need for good financial reports on demand.
You may have been happy to wait until the accounts were done for tax purposes, to find out if you had made a profit or loss and had a tax bill due.
The point is, if you need funding for business growth or survival, you will need good current accounts, at least up to the last quarter.
I have seen many times where the books were being done, but the quality of the data entry, has severely compromised the quality of the information output. Obviously if the transactions are not entered correctly, your reports from accounting software will be very misleading.
To give such a set of accounts to a bank, with incorrect treatment of transactions, the bankers will question the ability of the business owner to manage their own money, let alone that of the bank’s.
How do you get your accounts in shape for both management reporting and borrowing purposes?
- Firstly your basic bookkeeping needs to be good quality and accurate.
- Your Chart of Accounts needs to be set up right from the start. This is the accounts that you set up in your accounting software to categorise expenses and so forth.
- Have ‘Direct Costs’ been allocated to the correct accounts or have they been allocated to an expense account or overheads? This can have a big impact on the gross profit shown in the Profit and Loss Statement. If the bank check against industry benchmarks your results could be way out of line.
- Some reconciliation may need to be done to ensure it all makes sense e.g. is the total of your Accounts Receivables report the same as the figure shown in the Balance Sheet?
- Does the bank account reconcile or has it been fudged? This means have entries been entered in the past to make it balance?
- Has the GST been properly reconciled and have you paid or been refunded the correct amounts?
- The accounts may need to be reviewed by someone other than the bookkeeper, if you aren’t 100% sure of the bookkeeper’s skills and qualifications.
- If you don’t have an in-house or outsourced Financial Controller you will need to approach your accountant.
- They will need information from you regarding the last couple of years accounts, if they aren’t already available.
- They will need information about the current year results from your accounting software and your bookkeeper.
- They will need to sit down with you and come up with the projections for how you think the business will perform in the next year or two.
- They will need to get information from you to produce a Cashflow report, so the bank can see your cash position in the future.
As you can see there is quite a lot of work to prepare for a lending application. Getting it right though can pay big dividends, if you want to assure the bank of your financial control management. Good information will set you apart from the others, who roll in with numbers on scrappy bits of paper, hastily prepared with dubious accuracy.