Search
Related Links

 

 

Informative Articles

A "Cyber" Staffing Solution for Small Businesses
Consultants, entrepreneurs, and other independent professionals often find themselves performing a juggling act: providing their products and services while also carrying out tasks related to marketing, customer service, and day-to-day operations....
Achieving Competitive Advantage through Collaboration with Key Customers and Suppliers
An Evolving Operational Focus In the past when companies pondered corporate strategy, operations had been peripheral to the discussion. Operations were considered a technical matter with one way of doing things and therefore not,...
Performance Measures: A Key to Organizational Success
Performance Measures: A Key to Organizational Success By: Satgin Seraj In order to succeed in today's complex, fast paced and competitive business environment, organizations need to utilize tools that help them gain and maintain a strong...
The Project Management Mindset
Project management as a science and art is undergoing key transformations as a result of countless stories of failed projects, cost overruns, and canceling that project that took 2 years of your employee's lives. Needless to say, these scenarios...
Top Tips for Effective Time Management
Top Tips For Effective Time Management Time is a precious, nonrenewable resource. That's why you should value every moment, hour and day that you have. And just as a well-run business should carefully develop a strategy for spending money,...
 
Understanding Financial Statements When Approaching Lenders

“The bank is asking for our financial statements”, these are 8 words that often bring apprehension to many business owners. They are a young and maybe struggling company, they need bank financing to survive, and they haven’t got a clue what the financial statements are telling them, what they should be looking at, or what the bank wants to see. Many will delay providing the required financial information to the bank, but this is the worst thing you can do. Going to the bank shouldn’t bring on apprehension. Having a basic understanding of financial statements and being prepared when you approach a bank, or any investor, will go a long way in reducing your apprehension.

The Basics

The bank, or any investor for that matter, uses financial statements to tell them what happened in the past. Statements are also used as a means to predict what will happen in the future. Creditors are concerned about whether income (cash flow) will be sufficient to cover interest and principal payments on their debt. Of course, predicting profits into the future is an uncertain science. For this reason, creditors use various analytical tools to help them assess and interpret key relationships and trends that will help them judge the potential of success in the future. It also helps them predict whether a firm has sufficient resources to handle a temporary financial crisis.

Financial statements are historical documents covering single time periods. Users of financial statements, however, are not so much concerned about the single time period as they are about the trends over time. Trend analysis is usually completed on key indicators, such as revenues, gross profit margin, operating expenses, and working capital components such as accounts receivable, accounts payable and inventory. Through comparison of ratios and trends you can make informed judgments as to the significance of results. That is why banks or other investors often want 2 or more years of business results before they will lend.

Although trends and ratios are a starting point, they can often raise questions, the answers to which you can only get through analyzing industry trends, economic factors and the company itself. Typically, unless you are a master of presenting information, bank lenders will ask questions of you and your business. This is normal as they are trying to learn as much as possible about you and your business. Once again, be prepared, this will show you understand your business and its finances and that will make the bank more comfortable in lending to you.

The Balance Sheet

Banks primarily lend off the balance sheet and the cash flow statement (primarily operational cash flow). That does no mean that the income statement is not important, it is, but the balance sheet essentially encompasses what happens on the income statement and the cash flow statement tells a lender whether you are actually generating enough free cash flow from which you can make debt payments.
So what is important on the balance sheet?

Working capital
Current assets minus current liabilities, working capital tell us how much short-term assets we have to pay off short-term liabilities. The greater the amount of working capital the more funds a company has to finance its growth. A negative number is not good and can signify pending trouble. A typical rule of thumb is a ratio of assets over liabilities of 1.5:1. Questions you need to be able to answer are: trends in the ratio, what are the components of the assets and liabilities and how liquid are the current assets (for example, not all inventory can be liquidated quickly).

Accounts Receivable
You want to maintain your receivables in line with industry standard, or better. High growth companies can often have a high growth rate in receivables that they need to finance, but the average number of days outstanding should not get out of hand. If they do, for example climbing from 60 to 90 days or more, this often indicates a weakness in management. If this happens be prepared to have a plan in place to reduce the outstanding receivables. A lender will typically look to answer the following: is there a concentration to a few buyers, what are the age and terms of the receivables, what is the quality of the receivables and what is the value of the receivables in a liquidation scenario?

Accounts Payable
As with receivables, you need to maintain payables in line with industry standards. Often, growing companies will let payables stretch to finance growth, this is ok in the short-term as long as the payables don’t go overdue and you maintain good relations with your creditors. Once again, the age of the payables will be looked at as well as any concentrations to a few creditors. Make sure all payables are up-to-date and any security priorities should be noted.

Inventory
The composition of inventory needs to be evaluated. What amount is work-in-progress and what amount is finished goods? Obsolete inventory needs to be closely monitored. Banks will look at the potential obsolescence of inventory before they lend on the value. Often they are not interested on lending on goods that have no or little value if the business ceases operations. This often frustrates business owners, but it is a reality they need to deal with. Showing that there are strong controls around inventory can often help a business owner's case with the bank. If you are


exporting large ticket items internationally, look to having your receivables insured.

Equity (Tangible Net Worth)
When I refer to equity, I really mean tangible net worth or the equity in a business less any intangible assets. Intangible assets can include (but are not limited to) goodwill, patents and sometimes prepaid expenses. Depending on the arrangement with the bank, shareholder loans may or may not be considered as part of the equity base. A ratio of tangible net worth to total debt of 1:1 or better is a good goal to shoot for. Basically, the bank wants to make sure that the owner has also invested in the company, that the company can support its present and future endeavors and that it has the ability to withstand any unplanned declines in business.

Debt
Having debt is not bad, but having too much debt is. Look at what the make-up of your debt levels are and what the debt has financed. Does the maturity of the debt properly reflect the related assets? Is there any term debt supporting working capital, or revolving debt supporting long-term assets? If the answer is yes then you should look at restructuring the debt to properly reflect the assets. Review the company’s debt in relation to the company’s cash flow and assess its ability to meet debt obligations. Do you have the required credit available to meet seasonal borrowing requirements?

Inter-company assets/liabilities
Keep in mind that the bank will not lend off of inter-company receivables. Next, you should be able to answer the following questions: are the assets liquid and do they have value, can the related company meet its obligations, what are the terms of outstanding debt, is there any off-balance sheet debt or assets, can funds flow freely between the companies?

The Income Statement

The income statement provides information on a firm's operating activities over a specific period of time. In simple terms it is revenues less expenses. However, as is seen by all the accounting scandals recently, how those revenues and expenses are recorded can often be left open to interpretation and manipulation. A lender is well aware of the manipulation that can occur and so will look at the income statement carefully. If there are any “gray” areas the lender will want clarification, so be prepared to be able to answer any questions asked of you. Or, have your accountant prepared to answer any questions.

As with the balance sheet, a lender will rely heavily on trends and key ratios and will want to know the why of any significant movements in these ratios. Key areas they will focus on are the growth or decline in sales, net profit, gross margin and administrative expenses.

Important areas you should be aware of are:

• Are you expensing or capitalizing expenditures?
• Are operating profits stable?
• Are there areas of weakness? If yes, what action is management taking to work on these weak areas?
• Are there any extraordinary losses of gains?
• Are inter-company transactions having an impact on profits?
• What transactions are being completed to minimize profit and tax?

The Cash Flow Statement

The cash flow statement is a summary of a company’s cash flow over a period of time. It is basically actual (i.e. not accrual) cash receipts less actual cash payments. A cash flow statement will have 3 parts to it: 1) cash from operations, 2) cash from investing activities and 3) cash from financing activities. The bank will be most concerned about cash from operations as this tells it whether the company can generate sufficient cash from day to day business activities to repay loans. However, it is still important to be able to generate a cash surplus after all activities – i.e. operations, investing and financing. The quality, consistency and sustainability of cash flow is key.

Important areas you should be aware of are:

• Changes in working capital – movements in accounts receivable and payable and inventory, especially for a growing company, can mean a company is a net user of cash. This may indicate liquidity problems.
• Look at ratios such as sales to cash from operations and interest and principal payments to cash from operations. Negative trends can indicate lack of controls, inefficiencies or bad investment decisions.
• Look at factors that may impact total cash flow (cash from all activities) such as dividend distributions and taxes.
• Are there any extraordinary items affecting cash flow?
• Are there any capital expenditures which may have a negative impact on total cash flow?
• Examine the relationship between the change in sales and the change in cash flow. Are there any weak spots such as a declining gross margin? What action is management taking?

As you can see that there is a lot of information that needs to be assessed. That is why it can take a few days to get back with lending decisions, particularly if the statements are complicated. The goal is to provide you with a basic understanding of what is being looked at so you can be prepared when approaching your lender. As always, the more prepared you are, the better chance of success you have.

About the Author

Jeff Schein is a CGA and offers consulting and advice in the areas of business planning, strategic planning, business analysis and financial management for new ventures and growing small businesses. Send mail to:jeff@companyworkshop.com

 

Strategic Planning (in nonprofit or for-profit organizations)
Adapted from the Field Guide to Nonprofit Strategic Planning and Facilitation. ... First, a Point About For-Profit and Nonprofit Strategic Planning ...
www.managementhelp.org
 
Basic Description of Strategic Planning (including key terms to know)
Adapted from the Field Guide to Nonprofit Strategic Planning and Facilitation. ... Strategic planning often includes use of several key terms. ...
www.managementhelp.org
 
Strategic Planning, Strategic Plan, Business Strategy, Strategic ...
Strategic planning advice with free strategic planner & sample strategic plan covering mission statement, SWOT analysis with business plan software for cash ...
www.planware.org
 
Strategic Planning
FAQs regarding strategic planning - geared primarily toward non-profit organizations but with enough detail and general information to provide useful ...
www.allianceonline.org
 
Frequently Asked Questions
Strategic Planning · Fundraising · Financial Management · Risk Management · Credit Card Acceptance. The FAQs (Frequently Asked Questions) listed on this ...
www.allianceonline.org
 
Strategic planning - Wikipedia, the free encyclopedia
Strategic planning involves defining objectives and developing ... Strategic planning uses "the big picture" to pursue large scale, long term objectives. ...
en.wikipedia.org
 
08/26/96 STRATEGIC PLANNING
You guessed it: strategic planning. Suddenly, the idea of rising above the ... But if strategic planning is back with a vengeance, it's also back with a ...
www.businessweek.com
 
Dr. Strategy - Dr. Pete Johnson, Keynote Speaker, Marketing ...
StrategicPlanning.com “Turning Change Into A Competitive Advantage”. Dr. Pete's Preview Video Click Here. Take-Away Value Sample Program Handouts ...
strategicplanning.com
 
Strategic Planning Society: Strategy Development and Implementation
Strategic Planning Society: Strategy Development and Implementation.
www.sps.org.uk
 
Guide 7
Strategic Planning in Smaller Nonprofit Organizations ... In short, as a result of a strategic planning process, an organization will have a clearer idea of ...
www.wmich.edu
 
STRATEGIC PLANNING MANUAL
File Format: PDF/Adobe Acrobat - View as HTML
Your browser may not have a PDF reader available. Google recommends visiting our text version of this document.
 
BPubs.com: Strategic Planning & Business Planning Articles
Business Publications related to Corporate Strategic Planning.
www.bpubs.com
 
Strategic Planning Tools
Strategic Planning is a method for positioning an organization to take ... A strategic planning process incorporates an in-depth planning model that takes ...
www.nsba.org
 
Center for Simplified Strategic Planning, Inc.
The Center for Simplified Strategic Planning offers training, seminars, consulting, speakers, workshops, a book and a newsletter on strategic management for ...
www.cssp.com
 
LEADERSHIP: Strategic Planning and Strategic Management
Introduction: Is strategic planning really worth it? ... The purpose of strategic planning is to encourage thinking about your organization's "big ...
vskn.ca
 
The CEO Refresher Archives - Strategic Planning
When done right, the integrated strategic planning process can take a ... Strategic Planning and Project Management: The Key to Successful Implementation ...
www.refresher.com
 
HEFCE : Publications : 2000 : 00/24 - Strategic planning in higher ...
This guide reviews good practice in strategic planning in higher education (HE). It originated in a consultation exercise which we held in 1998 to review ...
www.hefce.ac.uk
 
The Association for Strategic Planning
The Association for Strategic Planning (ASP), is a non-profit professional society whose mission is to enable people and organizations to succeed through ...
www.strategyplus.org
 
Amazon.com: Strategic Planning for Nonprofit Organizations: A ...
Amazon.com: Strategic Planning for Nonprofit Organizations: A Practical Guide and Workbook: Books: Michael Allison,Jude Kaye by Michael Allison,Jude Kaye.
www.amazon.com
 
Amazon.com: Simplified Strategic Planning: A No-Nonsense Guide for ...
Amazon.com: Simplified Strategic Planning: A No-Nonsense Guide for Busy People Who Want Results Fast!: Books: Robert W. Bradford,Robert W. Bradford,J. Peter ...
www.amazon.com
 
 

 
Content Menu

  • 10 lessons for every shoestring entrepreneur

  • 10 reasons why time and attendance systems are not just substitutes for clock cards

  • 10 tips for managing your time

  • 10 ways to help you plan your home office for productivity and comfort

  • 2005 economic update industry specific 2005 total compensation budget predictions

  • 5 steps to powerful negotiating feature article

  • 5 warning signals your business might have a cash flow problem

  • 6 steps to laying out your competitive strategy

  • 7 essential elements of leading change

  • 8 reasons the holidays are a great time to build your business

  • achieving competitive advantage through collaboration with key customers and suppliers

  • affluent market may disappoint retailers by spending less for december holiday gifts

  • affluent men spend twice as much on holiday gifts for their spouse as women do

  • affluent name recipients of december holiday gifts in new survey

  • affluent turn cautious in outlook for personal spending and the economy

  • attract and retain top talent

  • a cyber staffing solution for small businesses

  • a guide to performance management

  • a real business coach

  • a renewed view of the modern business culture

  • a strategy for success

  • balanced scorecard strategic planning

  • barriers to effective planning

  • being a home based business owner whats not to love

  • being stressed out may not be all that bad

  • best practice benchmarking the path to excellence

  • blueprint for change

  • book summary mind your own business

  • bottleneck oriented business management

  • bridge loans everything you wanted to know

  • building win win alliances

  • build winning alliances

  • business 101 passion before planning

  • business growth through strategic merger and acquisition

  • business intelligence advancements transform corporate decision making

  • business or leisure make sure you get the best stay

  • business planning 101

  • business planning myopia

  • business plans what consultants dont tell you

  • business plan basics

  • business process automation bpa

  • buying a business advice for the first time buyer investor

  • buy now retire later an investment in your dreams

  • cash flow profits and the cash conversion cycle

  • change management can lead to rigidity and resistance to change

  • change may be your ace in the hole

  • chasm of change restructuring the goliath of change

  • choking on itil a menu for success

  • client service as a competitive advantage

  • coaching an adapting tool for attaining fulfillment in the global economy

  • coaching for lawyers 10 ways a lawyer can benefit from working with a professional coach

  • collaboration not competition

  • common sources of financing for small business

  • comparing corporate and personal goal attainment programs that have developed over thousands of years with modern day programs

  • compensation committee 101 what does it do

  • competitive marketing analysis

  • creating a business strategy

  • creating a vision

  • cultivating your pathway to success dont leave your companys future to chance

  • dealing with anger

  • developing your mission

  • develop a successful business foundation second to none

  • discover the coach within you

  • does your culture support or sabotage your strategy

  • dont allow yourself to get burned

  • embrace diversity to build effective teams

  • entrepreneur to employer considerations

  • famous business strategies

  • fatal mistakes to avoid when writing a business plan

  • finding and keeping good people

  • five strategies to strengthen your companys financial management

  • focus on results not money

  • four reasons why small businesses succeed or fail

  • franchises exit strategies

  • franchises whats the exit strategy

  • generating publicity will the media be interested in my product business

  • getting and keeping good people

  • getting together the importance of business relationships

  • have you ever thought of joining or forming a consortium

  • help wanted new business leadership required to jumpstart the american economy

  • home business grants

  • how effective is your leadership style

  • how joint ventures can catapult you to success

  • how not to let powerpoint kill your presentation

  • how to accelerate the return on investment roi of your senior talent

  • how to create a great mentoring relationship

  • how to develop a successful board of advisors and why you should

  • how to develop multiple streams of 100 000 home business income

  • how to easily accelerate your profits

  • how to use graphs and charts in your business plan

  • hr off shoring outsourcing a buyers market

  • human resource communication pays off

  • ideas are free a book summary

  • identifying candidates for leadership

  • if one does not do any planning one is planning to fail

  • improve profitable roe with retention

  • index

  • investing in the czech republic outside of prague part 1 brno property

  • investments short term or long term

  • isg expands to include denovo bank consulting

  • its spring time for a compensation program tune up

  • its time to get all strategic small business marketing stategy

  • i wanna hold your hand first time homebuyers

  • i want to get a mortgage fast online

  • job search lessons from the super bowl

  • job talk the heart of productivity

  • leadership and customer service is there a link

  • leadership development turn on your employees

  • leading with power and authority energize others with deep green leadership

  • learn to manage your projects with project management training software

  • living life in a time starved world

  • lone wolf lead wolf

  • make your mark how to attract clients and grow your business

  • making the most of your year

  • making your item get the best bid on e bay

  • management span of control and the power of models

  • managers have you been shortchanged

  • managers lets call a spade a spade

  • managers should your pr budget stress tactics or strategy

  • managers you know your job but what about public relations

  • managing the human resource project

  • managing transformational change within the public sector

  • managing with vision

  • marketing planning and control systems from agency style to nerve center

  • maybe you should worry about your pr

  • meetings bloody meetings

  • merger and acquisition an engine for corporate growth

  • millionaires name top choices for holiday gift wish list

  • mission and vision statements foundational to successful change

  • new years resolutions for your business

  • non profits need new strategies to weather budget crisis

  • not another ice breaker team building with a purpose

  • oe consultants is there a future for them

  • operational excellence for wholesale distributors

  • performance measures a key to organizational success

  • planning to make a decision

  • plan for business success 6 reasons to succession plan

  • practice on purpose working on your business

  • pragmatic consulting from the clients perspective

  • preparing to be an entrepreneur

  • printing offline

  • professionalizing the family business

  • professional intervention in the family business

  • profit the goal and more than margins

  • pr lets dump the smoke and mirrors

  • public relations a natural phenomenon

  • public relations converting the non believers

  • public relations defining your organization from the inside out

  • public relations power tool for the 21st century

  • quality consulting major consumer products company

  • quick books and finances

  • ready fire aim

  • ready setwait

  • renovations and upgrades bring it to the bank part 2

  • resolve to focus on results in 2006 website results that is

  • rotator

  • rules to setting business goals and objectives why and how to be smart

  • secrets to successful publishing

  • selling your business for the best price

  • selling your technology company why earnouts make sense today

  • sell a business 10 steps to maximize selling price

  • setting goals and implementing change

  • setting you sails the mission statement

  • should you write your own business plan

  • six disciplines for excellence

  • small business planning three myths

  • small business q a swot analysis is no magic 8 ball

  • small business q a the business autopsy a fact of life

  • so you dont have a business plan why not

  • starting a small business is just like running the peachtree only tougher

  • starting your business avoiding the me incorporated syndrome

  • start thinking strategically about your business

  • strategic clarity for communication management

  • strategic internet marketing 5 basic keys to online business success

  • strategic organizational learning

  • strategic planning and consulting

  • strategic planning basics

  • strategic planning for salespeople

  • strategic planning steps for optimum business management

  • strategies to time management

  • succeeding as a seller on e bay

  • succession planning problems getting started

  • succession three tips to ease the transition

  • succss tip business plannning 101

  • survival without computers

  • surviving survival

  • swot analysis is no magic 8 ball

  • swot analysis strengths weaknesses opportunities and threats

  • tactical hints for succession planning

  • tales from the corporate frontlines try try again

  • temporary staffing agency how to start

  • ten tips for creating a terrific employee appraisal system

  • ten ways to sharpen your business edge

  • the 7 traits of an exceptional and successful entrepreneur

  • the 7 traits of an exceptional successful entrepreneur

  • the art of succession planning

  • the business autopsy a fact of life

  • the case of the vanishing technology

  • the challenges of human resource management

  • the collapse of enron

  • the crisis of modernity

  • the dos and donts of creating business partnerships

  • the five biggest mistakes an hr professional can make from the clients perspective

  • the inferno of the finance director

  • the magic and mystery of teams

  • the project management mindset

  • the role of the business model and strategy for business

  • the ten pillars of leadership and business development

  • the three factors of leadership motivation

  • thoughtleading the art of separating yourself from the pack

  • three planning myths

  • three steps to give your strategic plan traction

  • time management is a work of art

  • tips to maximize the sale of your business

  • top tips for effective time management

  • to all managers how does add affect your workplace

  • trade show exhibit booth 7 tips to improve yours

  • trade show victory

  • trend setting how office art improves productivity

  • understanding financial statements when approaching lenders

  • useful tips for evaluating your meeting venue options

  • what are we teaching pr students

  • what could macedonia learn from a tiger the asian tigers and the phenomenon of uninterrupted economic growth

  • what if peter drucker were your ceo

  • what is a trainer what is a facilitator

  • what is google adsense

  • what to consider before approaching lenders

  • what your home based business plan can do for you

  • what you must do for one whole day every week for your business

  • when and where the affluent shop for december holiday gifts

  • when tactics are not enough

  • who do you talk to

  • why bother with customer centricity

  • why have a mortgage coach

  • why just the right ppc campaign management brings in lots and lots of cash

  • writing a business plan

  • your 7 minute mba

  • your business or your life why not both

  • your online fortune is just a click away