Need a Business Loan? Think Like a Lender

When you apply for a business loan, you have great reasons to want the lender to respond positively: as an entrepreneur, you’re confident about the future of your business; you have accepted the risk of devoting your time and knowledge to the venture; and with more cash, your dreams of greater profitability will surely be realized.

Or will they?

Banks are not confronted with the same risks and rewards as business owners. A bank lender doesn’t participate in the upside potential of your company. The bank isn’t entitled to a huge payoff by sharing in future profits. Lenders only earn a modest amount of interest. And they may not even receive that if the loan doesn’t produce the desired cash flow.

Therefore, as a borrower, you must demonstrate that your business is worthy of the lender’s risk.

Business financial history

The bottom line, as far as the bank is concerned, is that the loan is repaid. So walking into a bank without proof that you can be trusted to do this is a fool’s errand. The loan application process is an informative presentation of facts, not a sales pitch.

When your business is ready to seek a loan, approach the bank with up-to-date, accurate financial records. You will not succeed with financial statements that are like an un-watered Christmas tree with its needles shedding everywhere. Lenders must be comfortable with the completeness of your financial data. Your lender will consider you unfit for borrowing if your accounting is inaccurate.

Ensure you have Balance Sheets, Income Statements, and Cash Flow Statements for each of the past three years plus the most recent month-end. You’ll also need the previous year’s tax returns that match your financial statements.

These statements reveal profit margins, overhead costs, and cash coverage for loan repayment. Be prepared to discuss these measures and the trends they show over time. Understand each figure and its past fluctuations. Practice sentences that begin with, “This loan has a reduced risk because . . .”

Loan benefit and repayment

You will need to show how you will repay the loan. This is generally a function of how your business deploys the loan proceeds. Therefore, present the borrowing purpose clearly and explain how it will benefit your company’s ongoing success. Perhaps the loan will permit the company to expand with new space or equipment, or it may allow you to accept more work while waiting for payment for completed jobs, thus improving cash flow.

Financial forecast

Whatever the purpose, it should define an expected business improvement and demonstrate the advantages – and the loan repayment strategy – with a financial forecast.

These projections of future cash flow are built by using the time and cost of sales to customers, the gross profit on sales, and overhead expenses. Forecasts must be consistent with known facts. So don’t be overly aggressive in your assumptions.

Remember that your accounting professional can be a great source of support. He or she will be able to help you construct a conservative, believable forecast so you’ll win your loan.

Avoid Future Tax Stress: Plan Now for This Year’s Tax Bill

Discovering you owe more than you thought on last year’s income taxes is about as welcome as the flu.

And the end of the year, when your tax obligation calculated, is too late to start considering how to pay it. Do yourself a favor: start planning for this year’s taxes now.

To reduce last-minute tax stress, you need a system to ensure you have funds available when your tax bill is determined. Understand that only a portion of your business income has ever actually belonged to you; basically, you’re “holding” a certain percentage for the government, which you will remit at tax time.

So now that last year’s income tax has been finalized, your accountant can provide your effective tax rate, defined as your total tax liability divided by your taxable income.

However, you may want to consider this number: total income tax as a percentage of gross income before deductions. Assuming your deductions vary with revenue, applying a tax rate to every dollar of revenue is a reasonable general estimate of future tax.

That said, some deductions are fixed, not variable, and rising sales this year may push you into a higher bracket, but a finely formulated tax estimate can consider these factors in quarterly checkups.

Whether the tax percentage is general or finely calculated, set aside that portion of every dollar earned this year to prevent last-minute scrambling to pay your next tax bill.

And you’re also less likely to spend it before you need it for 2017 taxes.

Link Financial Reports for Long-Term Success

A business owner’s singular focus on revenue commonly results in false interpretations. Long-term prosperity requires management of risk. That process demands knowledge of all operational variables, including costs, assets, and debt.

Wise entrepreneurs differentiate themselves from the mass of people who respond to financial records with blank stares. Rather than seeing mere numbers on pages, a business manager visualizes an interconnectedness of various reports that paints a picture of current conditions. Here’s how:

1. Review reports: Accounting software has relieved business operators of the burden of compiling financial statements. Since these records simply come together when transactions are recorded, ignoring them is a strong temptation. Instead, the wise entrepreneur uses the time saved on this process to frequently examine financial reports.

2. Connect the dots: An Income Statement shows revenue and expenses. The resulting profit or loss carries over to Retained Earnings on the Balance Sheet. Profits producing positive Retained Earnings are offset on the Balance Sheet by increasing Assets. Knowing which of these was acquired with profits is crucial to uncovering where the money is going.

Losses or lower profits on the Income Statement reduce Retained Earnings. The Balance Sheet shows either fewer assets or higher debt. Frequent examination of the Balance Sheet allows business owners to identify what’s occurring in the relationship between revenue and expenses on the Income Statement. This examination provides the data needed for accurate interpretation and continued business success.

Financial Forecasting: Is There a Better Way?

Some business owners react to adversity like the impulsive person who buys a four-wheel drive vehicle after a late winter blizzard – when springtime is right around the corner. Rather than panic and needlessly overspend, the superior entrepreneur is guided by a plan. A financial forecast is the perfect tool for this plan.

A financial forecast presents prospective revenue, expenditures, and resulting cash flow. Most importantly, it conveys capital inflow needs and indicates when those needs are expected to arise. The forecast alerts you to make adjustments in areas you control when surrounding circumstances vary from your estimates. As actual events unfold, any deviation from the forecast is cause for corrective action.

Creation of a financial forecast is often an unfulfilled goal because the process is bounded by uncertainty. The forecast is based on estimations about a future that is always somewhat unpredictable. Therefore, a sound mechanism for maximizing the reliability of estimates is essential. Business owners can utilize one of two methods to construct their forecast: top-down or bottom-up.


Most small-business operators deploy top-down forecasting. This method starts with an estimation of the top line-item in a forecast-revenue. A common practice is reliance on past revenue. Added to this figure is an optimistic amount of growth. Sometimes future revenue is projected based on anecdotal evidence about the performance of similar companies in your industry or local competitors. Top-down forecasts frequently estimate the size of a customer market and the expected share of this market the business will capture.

A problem with this analysis is that industry trends constantly change. Failure to consider the direction of change is a major drawback. Moreover, top-down forecasting is especially difficult for businesses with limited histories on which to base estimations of market share.

Hence, a dependable top-line number is very elusive. When actual revenue strays from the predicted top line, the foundation of the entire forecast is skewed. You constantly adjust the financial forecast with new wild guesses.


A bottom-up approach to forecasting takes you out of the backseat and into the driver’s seat. This technique ignores guesswork about market size and market share. Rather, it considers the resources at your disposal and identifies projected revenue based on what you have to invest in the business.

Consider how many sales you can make utilizing your available time and money. With this information, you determine the number of customers you’re likely to capture and identify revenue by multiplying by the average price each customer pays.

Key to bottom-up financial forecasts is what drives your sales. This could be advertising expenditures, rent for an optimal physical location, investing in an efficient inventory tracking system, spending on tools needed for project completion, or reserving funds for necessary business travel. Comparing your eventual revenue and expenditures to forecasted figures reveals the true relationship of spending to revenue. This permits sensible modification to your financial forecast. You uncover what revenue to truly expect and how much additional investment is needed for robust growth.

How to Account for Products Bought for Resale

Whether your business is driven by product resale or selling components with accompanying services, it’s necessary to account for inventory. Special rules apply to inventory accounting, even for a smaller operation maintaining cash basis books that record expenditures as they are paid.

Financial trail

Inventory is defined as merchandise your business obtains for the purpose of selling to customers. Accounting for expenditures for these items is not considered a business expense until the merchandise is sold. Rather, the cost for resale merchandise is recorded on the company balance sheet as inventory. The business merely exchanges a cash asset for inventory assets.

Inventory appears on the balance sheet at its cost, not its retail value. When inventory is sold, the cost for these items is transferred from the balance sheet to the income statement as “cost of goods sold.”

The cost of inventory includes delivery. So purchasing 1,000 units of item “X” for $3,000 plus $50 in shipping expenses results in a cost of $3.05 per item. When one hundred items are sold, inventory is reduced by $305.00 and cost of goods sold is increased by the same amount.

The circumstances clearly become complex if cost for the same item changes. Acquiring another one hundred units of item “X” for $320 plus $15 for shipping results in $3.35 per unit added to inventory. When two hundred more items are sold, confusion reigns.

The default accounting method for variable inventory unit costs is called FICO-an acronym for First In, First Out. Accordingly, the cost for the two hundred sold items is $3.05 each. You’re still selling from your original 1,000-item batch. But if you’re selling 1,000 items, the first nine hundred are the remaining units from the original batch and the next one hundred are from the second batch, and have a cost of $3.35 each.

Simplifying inventory

All small businesses should consider an inventory tracking system. The “periodic” system places all inventory purchases in a “cost of goods sold” account, a temporary holding station. At the end of an accounting period – at least annually – a physical inventory count is taken, and the known inventory cost is recorded on the balance sheet. The difference between inventory figures from one period and those of the next offsets the cost of goods sold, so the purchases no longer belong in a temporary holding station. The difficulty in this method is assigning differential costs for units acquired at various prices; however, it’s satisfactory for smaller companies with few types of inventory items and little fluctuation in cost.

By contrast, “perpetual” systems continuously update the costs for all units on hand in the inventory account. Most accounting software will automate these systems, which are superior for tracking inventory in stock, as they constantly update the income statement for true FICO cost as items are sold.

Learning the data entry steps for these programs is challenging, but for larger organizations with multiple components of inventory, the output is certainly worth the effort.

It’s Easy to Account for an Asset Buy and Its Loan

Borrowing to acquire fixed assets is a widespread practice among small businesses, but it gets confusing when the business doesn’t account for the entire cost when it makes the purchase, but instead accounts for much of it when paying back the loan used to buy the assets.

In fact, companies are considered to have paid the full cost for an asset even if they take on debt to buy it. When a fixed asset is acquired, the bookkeeping process requires a journal entry.

An asset account on one side of the balance sheet is increased for the entire cost. On the other side is the addition of a note payable for the funds borrowed to buy the asset. A down payment made with company funds is the difference between asset cost and loan amount. This reduction in the cash asset balances the journal entry.

How it works

For example, consider a $10,000 equipment purchase that’s paid by $2,000 of company cash and $8,000 of borrowed money. A journal entry increases equipment assets (a $10,000 debit) while decreasing cash asset (a $2,000 credit) as well as increasing notes payable (an $8,000 credit).

Sometimes, owners are confused about where to account for their expenditures on loan payments. However, after accounting for the portion that is interest expense, each loan payment is simply applied to the note payable liability.

The takeaway: Loan principal is neither an expense nor an addition to the asset. Rather, the full cost of the asset was already recorded upon purchase. Easy!

Avoid Those Year-End Accounting Surprises

It’s a true business maxim: When you understand your financial statements, you remove the obstacles that cloud your judgment, and you validate the success you believe is unfolding. And by scrutinizing financial details, you’ll get truly rewarding insight into the status of your business. Not just a general impression.

Status check: By monitoring your financial statements at least monthly, you can see why you’re profitable. Or not. Sometimes, for example, robust sales don’t really increase profits. In many instances, rising revenue may trigger greater costs. Inspecting the trends in profit margin in crucial: If variable costs increase faster than sales, the profit margin suffers. Your business’s opportunity for growth is stunted until you address the environment for expansion.

Remember that accrual basis financial statements best reflect current conditions. Under this system, revenue is counted when earned, regardless of when it’s collected. Expenses are recorded as they’re incurred, not when they’re paid. Consequently, accrual basis tends to match the timing of expenses to the periods in which they produce revenue.

Many astute entrepreneurs use accrual financial statements for decision making and cash basis financials for income tax reporting. Accounting software commonly produces reports for either method.

Cash flow statement: Businesses run on cash, so you’ll need a cash flow statement. This report compensates for accrued revenue not yet collected and accrued expenses not yet paid. However, if customers usually pay invoices immediately, and you remit payment of your bills promptly after receipt, cash basis financial statements are usually adequate; they’ll deliver the same general figures as accrual basis reporting and eliminate the need for a cash flow statement.

Cash flow is also impacted by money that flows to categories such as loan repayment and equipment purchases. Evaluation of the business balance sheet reveals the extent of these changing balances. Moreover, the balance sheet shows compensation to you as the owner or shareholder of your company. Make sure you’re not drawing too much. Your take comes after you meet priorities that keep the business prospering.

Waiting until year-end to examine financial results inevitably leads to false interpretation. No matter what the size of your business, insist on accurate monthly bookkeeping. If you do maintain your own accounting system, get regular professional assistance to correct errors and omissions and help interpret the financial status of the business.

The accrual method eliminates wide swings in profitability rendered by the cash basis. Note that you likely will need professional bookkeeping help, if, for example, you experience substantial time lags awaiting customer payments or expenses that vary with revenue.

Contract projects: Businesses that handle contract projects for customers should know the profitability of each individual job. In job profitability accounting, your bookkeeper needs sufficient information to properly record events. For example, a bulk purchase for multiple jobs must be allocated among various projects.

Happy 2017: With timely and accurate financial statements – and by following an optimal methodology – you avert year-end surprises, identify profitable opportunities and are able to immediately implement improvements. What better way to go into a new year…

Enjoy a Successful 2017 Thanks to These Four Resolutions

Your 2017 New Year’s financial resolutions may be all about saving resources and improving revenue. Again. But consider the following to really help you achieve your financial goals.

The best move you can make is to improve your financial recordkeeping. This helps you prepare for contingencies and monitor your circumstances. If things are good, chances are you won’t consider changing up your recordkeeping, but note: implementing high-quality financial practices now will create a climate for advancement later.

Here are four financial resolutions that will lead to financial success:

Separate personal finances from business records. Nothing creates more confusion than tracking personal expenditures and business transactions with the same system.

Reserve for taxes. Whether you base your effective tax rate on a projection for the current year, or the actual rate from last year, set aside this percentage of your monthly income for tax remittance.

Plan for major costs. Replacing, repairing, or adding equipment; adding more space; moving; or hiring all necessitate large upfront cash outlays. Know what these costs are and when you may need to make these investments. Set aside a little money each month; you’ll be ahead of the game when the time arrives.

Use one bank account and one credit card. Avoid lost receipts and overlooked business expenditures resulting from using personal cash or credit: When the business needs more funds, move personal money to the business account and use it for all company transactions. Have a dedicated credit card strictly for use in business transactions. And have a prosperous new year!

Double-Entry Bookkeeping Offers Major Benefits

Sound bookkeeping is a harbinger of financial success because it helps build a foundation of best practices.

Today’s accounting software allows small operations to enjoy the same bookkeeping standards used by large organizations, and offers a much simpler way of tracking revenue and expenses than the spreadsheets many small enterprises are using.

Although learning about new software can be daunting, understanding how accounting software functions makes that a very worthwhile task.

Data available from a sophisticated accounting system is especially important if your business is a corporation. Tax reporting for a corporate entity requires substantial detail. Moreover, satisfactory business management – even by a solo operator – requires informed decisions on profit utilization. You need solid guidance about when profits may be distributed to owners as dividends rather than used for expansion.

Single entry

A simple listing of revenue and expenses-such as on a spreadsheet-entails making a single entry for each transaction. Single-entry bookkeeping might work for someone with a low-volume sideline business. But entrepreneurs, who are committed to their businesses as their primary income sources for the long run, soon discover that the single-entry method may result in a series of small errors with enormous unintended consequences.

As the name implies, single-entry bookkeeping is characterized by having only one number recorded for each event. But, in fact, every business transaction has two impacts: an expenditure of cash is a simultaneous decrease of business funds and increase in something else (such as an expense category).

Single-entry bookkeeping can only reveal cash flow; it doesn’t track accounts on the balance sheet like inventory, accounts receivable, accounts payable, and debts-information growing businesses require.

Double entry

The value of accounting software is that it automatically accomplishes the heavy lifting of double-entry bookkeeping. You make one entry, but the system records two. Both sides of every transaction occur in the background, but you can easily find a single transaction in both accounts that were impacted.

When a check is recorded in the software, it appears to only reduce the bank account. But in this software entry, you also select how the funds were used, and that selected account increases.

To select the correct account, consider the purpose of the check: For example, did you increase an expense, add to inventory, or purchase equipment? Or did you increase the amount you’ve repaid on a loan, lowering the liability balance owed? These are debits, and the bank account shows a credit.

Similarly, entering a bank deposit involves selecting an account representing the source of money received-company revenue, sales tax collected for future remittance to the government, proceeds from a loan, or personal cash contributed by the business owner. These sources are, respectively, credits to accounts for income, sales tax payable liability, note payable liability, or paid-in capital. A debit is recorded to the bank account for the cash increase.

Understanding the double-sided nature of every transaction provides superior information on which to base decisions. And this will make you a very savvy entrepreneur.

Try This Simple Hack for Projecting Next Year’s Revenue

With a new year on the horizon, it’s time to lay the groundwork for next year’s operations. Although many business owners believe that budgeting is impossibly useless for small operations with widely fluctuating incomes, forecasting revenue reveals where you’re going in the coming year and helps estimate marketing targets.

Here’s a simple way to project next year’s revenue: On a spreadsheet, list in the first column your existing and prospective projects for January. A retail business with sales to the public will list normal minimum sales volume and extra customer volume. Consider allowing for possible higher weekend traffic by treating weekends separately.

In the next column, record the expected revenue for each line in the first column. Then add a percentage of probability for the projected revenue in the next column to the right. For example, you may have a 100% expectation of some work, but only a 50% chance of closing a new deal or attracting above-average traffic on weekends.

The last column to the right multiplies projected revenue by the probability percentages for each row. The sum of this column is your revenue forecast for January. Repeat the process for the subsequent eleven months, and add the twelve revenue forecasts together to determine expected revenue for next year.

This technique results in a meaningful scenario by turning hoped-for revenue into realistic results based on probability. So a 25% chance of making a million dollars realistically means you can expect a quarter million.

It’s easy, it’s useful, and you can start now.