The management structure and internal culture of your business may offer some insight into the overall well-being of the company. However, there’s no greater window into a company’s prosperity and creditworthiness (or lack thereof) than accurate financial reporting. As a business owner, you have an obligation to yourself, your employees and your shareholders to understand how your company is performing financially. Moreover, it’s critical to have your financial “ducks in a row” before you approach a bank for financing, as banks require a clear snapshot of your financial health.
How can you build a foundation for good financial reporting? Start by creating a holistic depiction of the company’s finances with a set of standardized key performance indicators (KPIs). By tracking these values, you’ll be able to monitor and optimize expenses, sales, profit and cash flow. We’ve created a list of financial KPIs that every business should track to measure financial success.
- Cash flow forecast
- Gross profit margin
- Operating profit margin
- Revenue growth rate
- Inventory turnover
- Accounts payable turnover
- Relative market share
Through these KPIs, you’ll have data to compile financial reports, including your balance sheet, profit and loss statement, cash flow statement, accounts receivable aging report, accounts receivable days vs. accounts payable report and your budget vs. actual report.
Take the time to fully understand the financial condition of your business and be prepared to speak about it in detail to your lender. It can cause a loss of confidence if borrowers cannot discuss their financials or don’t know basic financial terms and ratios. At Live Oak, your lender will guide you through the complexities of the loan process, but it’s important for you to have baseline knowledge of your financial position. By tracking KPIs and being able to address them, you will be able to recognize if you’re hitting your business goals, or where you need to focus your efforts to make up for losses. When you can communicate clear business objectives to your lender through data like KPIs, the lender will be able to tailor a loan package to your needs.
During your initial conversation with a lender, you only have one chance to make a first impression. Make the best of it by putting together an accurate and complete reporting package. Lenders need assurance that your numbers are correct. When you borrow from a bank, they have a fiduciary and regulatory responsibility to make good loans. In order to streamline the loan process and set the tone for your business, provide a comprehensive financial package upfront. Sharing bits and pieces in a disjointed fashion creates confusion and unnecessary back and forth. Believe it or not, a loan officer may decide not to submit the request if they do not have confidence in the financial reporting. Their internal credibility is at stake when presenting a loan.
If for any reason there have been financial missteps (bankruptcy, disputed payments, etc.), it’s highly advisable to disclose them up front. Honesty is the best policy and it is best to address mistakes head-on, instead of trying to navigate around them. Banks and investors do deep dives into public records, so the odds are that they’ll discover any issues. Be prepared to explain the situation in detail by sharing what you learned and what steps you have taken to make sure the situation doesn’t occur again. People who make mistakes and overcome adversity achieve greater credibility. Even the best business operators will encounter problems, many times because of issues outside of their control. Timely accurate financial reporting will offer added credibility as you work with your banking and investment partners to find solutions. Inaccurate and late reporting creates concerns and may make your partners hesitant to assist you.
It’s evident how critical good financial reporting can be, but how do you actually execute on that? Whether you choose to outsource or tackle it internally, there are resources to help you. We asked Branden Crosby, CPA with Warren Averett, to weigh in on what it means to hire a professional to compile your financial reporting.
“Outside investors or financial institutions often request recent and accurate financial data for analysis before making an investment or loan. It is possible that some [business owners] have never prepared a set of financial statements throughout their career. This can be a daunting task and being able to bring in someone with high level experience may be of great benefit. We frequently see a lot of overwhelmed clients that are going through this for the first time,” Crosby states.
Crosby notes that there are several advantages to engaging an accounting professional to assist with your reporting. “At Warren Averett, we are actively assisting [businesses] with navigating the path to creating an accurate and valuable set of financial statements through our outsourced accounting services. The benefits of outsourcing are many: 1) mitigation of the risk associated with a single point of failure, 2) enhancing the skill level with the exact skills that are needed – when they are needed, and 3) breadth of service. The bottom line is that external reporting requirements can be stressful. We are here to eliminate the stress and provide financial institutions and outside investors with a peace of mind that the product they are receiving is accurate and coherent. In turn, this leads to more loans closed in a timely manner and this helps [businesses] thrive,” Crosby says.
As an alternative to outsourcing, Small Business Development Centers are available to assist you with your finances and are located across the nation. Small business owners and aspiring entrepreneurs can go to their local SBDCs for free face-to-face business consulting and at-cost training, on topics including business planning, accessing capital, marketing, regulatory compliance, technology development, international trade and much more. SBDCs are hosted by leading universities, colleges, state economic development agencies and private sector partners, and funded in part by the United States Congress through a partnership with the U.S. Small Business Administration. You can easily find an SBDC near you by doing a simple zip code or state search.
Creating a clear, accurate overview of your business’s financial wellbeing will benefit you in many ways. By tracking key performance indicators and documenting your financials in a timely, thorough manner, you’ll paint a clear picture of health of your business. Having a strong grasp of your financial position can guide your overall growth strategy and further inform your business goals.