by Debi Enders
To gauge a company’s financial strength, bankers like to review its financial statements. They are usually looking for answers to three basic questions:
1. Is the business profitable? To remain financially viable, businesses must earn a profit. Some companies’ profitability fluctuates. But it should also be predictable over time. That’s why bankers like to review your income statement (also known as P&L or earnings statement.)
2. Is the business generating sufficient cash flow? A business can have strong sales but still not generate the steady influx of cash it needs to stay healthy and grow. Therefore, it is also important for bankers to take a close look at cash flow. If sales are good but cash flow is suffering, they want to know why. Are the factors driving it temporary and easily addressed, or do they point to a more worrisome long-term trend? Using a cash flow forecast tool will help you keep a better pulse on when cash will come in and need to be paid out as well as identify trends unique to your business’s cash flow.
3. Are you in control of the business’s financial performance? Businesses typically need a loan to grow, replace equipment or fund seasonal needs, so it’s important to understand what is required by banks to be considered for financing. Bankers want to know whether you are actively taking the time to forecast, plan and budget your company’s financial future. They’ll need evidence of the business’s financial strength, so being able to show that you track actual performance against projections and use financial data to help guide decision-making will help prove your creditworthiness.
Bankers, in other words, need to review your financial records to prove that your business has sufficient assets and reserves to alleviate any concerns around the business’s health. More important, they want to see that you are taking a proactive approach to your finances.
Debi Enders (debi.enders@commercebank.com) is vice president, small business banking at Commerce Bank.
Submitted 5 years 171 days ago