Myth #2: I don’t really understand my financials, but they seem to keep the bank happy, so I’m okay with that.
Believe it or not, this statement is all too common. Obviously, the banking relationship is a critical one, at times the sine qua non of survival. But why hand over financial statements to a bank without understanding how the bank is going to use them? Worse yet, imagine the banker’s response when you can’t answer a “simple” question. You need to be able to look at your financial statements like a banker.
This is a tall order, so you need to do your homework. First, are your financial statements produced accurately and timely? Unfortunately most small businesses will answer “no” to this question. You can easily fix this by scheduling a meeting with your in-house accounting staff every month. The discipline must be inviolate, but it will pay off with improved understanding of the company’s financial standing.
Ask yourself, “How will the bank view these financials? What are the points that are critical to the bank? What parts of these statements worry the bank (i.e., losses, excessive leverage, poor current ratio, inappropriate asset investment)?” If you don’t know the answers to these questions, and you don’t have the time for self-education, then hire a professional to get you the answers. A few hours per month of professional help will be well worth it.
And be sure you address issues as they occur so that you can make necessary changes before it’s too late. For example, your financial statements may indicate that you should reclassify officer loans, pay down some payables, refinance some debt or monetize some receivables.
In sum, solid financial statements will enhance your banking relationships.
Next time we will look at Myth #3: I don’t believe I lost money!