10 critical elements you should look out for on your balance sheet... or you won't get business financing
If you're responsible for managing your company finances, you probably know how much money your business is making. You either know your bank balance or you calculate your profits and losses, right?
Well this isn't the only thing banks and funders look at when investigating your business's financial health. They'll look at your balance sheet too to see if your business is worth investing in.
And if you don't have a proper balance sheet, it will look like your business isn't financially healthy.
So, you won't be able to get financing.
Read on to find out the 10 elements you should look at when reviewing your finances so you can submit for business finance...
10 elements to look out for when reviewing a set of accounts to submit for financing
Put yourself in the financer's shoes and consider the following:
If you owe the bank money, why would anyone want to loan you money?
Bank/petty cash balance in the credit
And your petty cash can't be in a negative. It's physically impossible.
The first thing that pops up in my mind when I see this is:
How accurate are the expenses accounted for;
Are there items that have Vat inputs that you can claim for;
Have you performed a cash count? If not, there's a possible weakness in your control measures;
Is the bank reconciling? If not, why bother!
This means the shareholder has distributed or paid themselves money without paying the income tax on that. It's seen as distributions paid over a period.
Shareholders loans in debit
So if the shareholders can't pay themselves a proper dividend, why should a financer invest in this business? There's probably a tax implication you haven't accounted for properly. A financer will ask himself if he wants to get involved in this.
You as the shareholder have put money into the business, but why? Is it perhaps salaries not paid as yet? If you can't afford your salary as the director/shareholder, why should a financer invest in your business? It looks as if the company isn't able to support itself.
Shareholders loans in credit
This means you posted incorrectly. Creditors can't owe you money! If anyone owes you money, then they're debtors, so you need to account and disclose for it properly.
Liabilities in a debit/negative
This incorrect posting negatively affects the integrity of the balance sheet.
This is another example of incorrect posting. You can't have a negative asset so go look at what causes this to be in the negative. Does your company have a fixed asset register? If not, you should. And this is where you should look.
Assets in a credit/negative
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This means something, somewhere isn't balancing or captured. And the integrity of the trial balance and accounting information is questionable.
Opening balance suspense account
If you don't know where to allocate something, how should a financer? Should he invest in a company that doesn't know what's happening in its own business?
Why not pay your creditors? If you have, then what's happening with the posting? The integrity of your balance sheet is questionable. If it hasn't been paid, no way is a financier investing in such a business.
Unchanged balances for longer than two years (i.e. other creditors)
Most businesses need a computer, printer, office furniture etc. If you don't have fixed assets, why not?
No fixed assets
You haven't done a stock take and all expenses were accounted for in the income statement.
Retail and wholesale business without inventory
Your income tax expense will be understated and cause legal implications;
The assets are undervalued i.e. the shareholders' value is understated; and
The liabilities might be understated because the creditor might not have been accounted for.
Your company is factually insolvent and nobody wants to, or will invest/give funds to a company that's factually insolvent.
Net assets in a negative/equity is negative
And there you have it. Now you that you know what to look out for, you can correct your balance sheet before you submit it for financing.
But sadly, a missed funding opportunity isn't the only downside of an incorrect balance sheet! You could also declare the wrong taxable income to SARS, and be found non-compliant of IFRS, The Income Tax Act and the Companies Act of 2008! SARS won't hesitate to slap you with fines and penalties for this transgression. Avoid all this with the complete guide to compiling 100% legally compliant income statements and balance sheets here.
P.S. Discover the Excel functions and formulas you need right now to create error free financial statements, simply follow this link…
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