When I was working in a large U.S. multinational, anytime I was drawn on the carpet to report on the business for whatever reason (the good, the bad, and the ugly), the boys and girls in charge of the ivory tower always wanted to know three things:
Where is the business at right now?
How did we get here?
What are you going to do next to either take things to the next level or fix the existing problem?
If there was any fancy graphs or charts that drew their attention away from the above, I was always quickly pulled back into the world of what was important to them, and needed to focus in on answering these questions before any other form of communication was going to take place.
While perhaps not exactly the same with business lenders, you should be taking a similar approach with your business financing application.
The first question, where is the business right now, is answered by an up to date balance sheet and interim income statement. The balance sheet will be supported by an aged accounts payable and accounts receivable, and a fixed asset ledger.
The second question, how did you get here, is answered by three to five years of historical financial statements prepared by an outside accounting firm.
The third question, where are we going, is answered by detailed financial projections including at least 12 months of monthly cash flow projections, two years of overall cash flow projections, two years projection income statements and balance sheets that reconcile to the cash flow projection and the current financial position. The projections will need to include detailed assumptions that explain how every (every) number is created and what its based on.
While this would appear intuitive on the surface to most, there are two key areas where the information is lacking.
First, business finance applications do not connect the different areas together. There can be significant in-congruence between past and present, and between present and future. Its extremely important that the story being told by the financial statements (and the narrative report that should be included to minimize assumptions and off base interpretations) is congruent, well balanced, and flows from one period to the other without being disjointed or inconsistent.
Too often, business owners provide all the information, but don’t reconcile the collective package to make sure the story being told is tight and accurate and seamless from beginning to end.
Second, most business finance applications do a very poor job documenting the assumptions in the projections and providing good logic and support for all the numbers being projected. Past, present, and future are all important elements to every applications … equally important. Unfortunately for many business owners, the glossing over of the projections can result in declines or less than optimal terms.
If you need help answering these questions when seeking business financing, give me a call and we’ll go through your business profile from beginning to end together.