In the process of trying to secure business financing for a small or medium sized business, the business owner or manager is typically focused on presenting their business plan, historical financial statements from the accountant, and some projections for the future profitability of the business.
What is overlooked in many cases is the state of the accounting and/or bookkeeping system that counts the beans.
In this day and age of closer scrutiny by lenders and debt providers, its not uncommon for lender due diligence to reach into the bookkeeping and accounting system and practices to see if the proper rigor and discipline is being applied to the financial side of the business.
And what’s even more common is that most businesses score keeping systems are not up to par and can’t meet the standards of the person doing the reviewing.
When this happens, all the hard work it took to find a lender that was willing to provide business financing in the first place can quickly go up in smoke as the business owner’s credibility goes out the window along with all the ledgers and sub ledgers that don’t balance.
Its not at all uncommon for businesses to take a close enough is good enough attitude to record keeping, then through everything at the accountant at the year end to see if they can make sense of it in order to produce some sort of reliable and valid financial statements. Unfortunately, because year end filings aren’t required for months after the year end, nothing in the behavior tends to get corrected due to the fact that as soon as the books are finally closed for a given year, the business is half way through the next with another set of incomplete records already in the making.
The message here is basically that good accurate bookkeeping and accounting practices provide credibility and support for any lending decision a bank or institutional debt financier is prepared to make to a company.
Counting the beans properly should also lend to better decision making, better cash flow management, and greater lead time to deal with issues that are known sooner.
Good financial management is just as much a decision making factor to a lender as is the business strategy, owner experience, and historical financial performance.
And its likely that higher scrutiny is going to continue, especially after the high levels of loan failures of recent years.