Understanding Financial Statements When Approaching Lenders Written by Jeff Schein
“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 financial statements are telling them, what they should be looking at, or what bank wants to see. Many will delay providing required financial information to bank, but this is worst thing you can do. Going to 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 past. Statements are also used as a means to predict what will happen in 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 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 potential of success in 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 Financial statements are historical documents covering single time periods.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 single time period as they are about 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 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, answers to which you can only get through analyzing industry trends, economic factors and 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 bank more comfortable in lending to you. The Balance Sheet Banks primarily lend off balance sheet and cash flow statement (primarily operational cash flow). That does no mean that income statement is not important, it is, but balance sheet essentially encompasses what happens on income statement and 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 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 amount of working capital 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 ratio, what are components of assets and liabilities and how liquid are 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 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 outstanding receivables. A lender will typically look to answer following: is there a concentration to a few buyers, what are age and terms of receivables, what is quality of receivables and what is value of 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 short-term as long as payables don’t go overdue and you maintain good relations with your creditors. Once again, age of 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 potential obsolescence of inventory before they lend on value. Often they are not interested on lending on goods that have no or little value if 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 bank. If you are exporting large ticket items internationally, look to having your receivables insured.
| | Why PR is an Engine for Economic GrowthWritten by Robert A. Kelly
Please feel free to publish this article and resource box in your ezine, newsletter, offline publication or website. A copy would be appreciated at bobkelly@TNI.net. Word count is 1085 including guidelines and resource box. Robert A. Kelly © 2004. Why PR is an Engine for Economic Growth Business, non-profit and association managers committing their public relations resources to (1) doing something about behaviors of those important outside audiences that most affect their operation, (2) creating kind of external stakeholder behavior change that leads directly to achieving their managerial objectives, and (3) doing so by persuading those key outside folks to their way of thinking by helping to move them to take actions that allow their department, division or subsidiary to succeed – greatly increase chances of success for their operation. Thus, feeding engine of their own economic growth AND that of nation at large. But, in reality, it takes more than good intentions for any manager to alter individual perception leading to changed behaviors, something of profound importance to ALL business, non-profit and association managers. What they need is a simple PR blueprint that gets everyone working towards same external audience behaviors insuring that organization’s public relations effort stays sharply focused. For example, a blueprint like this: people act on their own perception of facts before them, which leads to predictable behaviors about which something can be done. When we create, change or reinforce that opinion by reaching, persuading and moving-to-desired-action very people whose behaviors affect organization most, public relations mission is accomplished. In that way, those same business, non-profit and association managers can see results such as new proposals for strategic alliances and joint ventures; customers making repeat purchases; prospects starting to work with them; membership applications on rise; capital givers or specifying sources looking their way, and even bounces in showroom visits. But HOW those managers pull that off forms real challenge. Here’s how best of them can do it. They find out who among their key external audiences is behaving in ways that help or hinder achievement of their objectives. Then, they list them according to how severely their behaviors affect their organization. But precisely HOW do most members of that key outside audience perceive their organization? If budget to pay for what could be costly professional survey counsel isn’t there, Ms. or Mr. manager and his or her PR colleagues will have to monitor those perceptions themselves. Actually, they should be quite familiar with perception and behavior matters. Getting that activity under way means meeting with members of that outside audience and asking questions like “Are you familiar with our services or products?” “Have you ever had contact with anyone from our organization? Was it a satisfactory experience?” And if you are that manager, you must be sensitive to negative statements, especially evasive or hesitant replies. And watch carefully for false assumptions, untruths, misconceptions, inaccuracies and potentially damaging rumors. When you find such, they will need to be corrected, as they inevitably lead to negative behaviors.
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