You are busy running a business. You’ve managed to keep generating sales and even profit. You have enough money to pay the bills most of the time and your customers are pretty loyal. Now you are ready to grow the business. You have worked up a quick business plan and figured out that you’ll need a loan to grow your space for the new business. You set up an appointment with your banker to work out the loan details. The day of the meeting You grab your income statement and are happy to say it shows a profit. The banker is going to like that. Then you print out the balance sheet which you figure probably tells him something about your business and you run out the door. What you didn’t know The meeting starts out fine with the banker liking your income statement. But then the questions start: What basis of accounting do you use? Did you work with an accountant to prepare these? Is your salary reflected in the payroll costs? Why is your current ratio so low? What is your monthly cash flow? What are your gross margins on sales? What is your collections experience? You leave the meeting with a list of information that you will need to gather before you schedule a second meeting with the banker. Don’t put yourself in this position. Take some time to consider your business from his perspective. The banker’s perspective A banker is looking to evaluate your ability to repay a loan. The basis of accounting is important information that helps him evaluate the information you share. The accrual method of accounting provides a more accurate picture of your business than the cash basis. Having an accountant involved gives your results additional credibility. He or she will always start with a review of the Statement of Cash Flows. He will look for positive operating cash flow and will want to see you making investments that help produce future revenues. From there he will want to see if you are generating profit on every sale and how you are managing collections for any sales on account. He will review your balance sheet and will look at the current ratio which is the ratio of current assets (cash, customer receivables, and inventory) to current liabilities (accounts payable, accruals and other liabilities due within a year). The higher the ratio, the stronger your balance sheet. He will look for positive retained earnings which indicate your willingness to reinvest a portion of your earnings in the business. He will also want to know about your business and managerial processes, your sales and marketing plans, and your intended use of the proceeds of a loan. When you are meeting with a banker, it pays to have well-thought out plans, clear and concise information, and a thorough knowledge of your important business metrics. And it usually helps to have a good relationship established well before you are in need of funds.
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