Unless you are an accountant, the last thing on your mind is probably bookkeeping. However, whether you like bookkeeping or not, it is important to the health of your business. This is especially true if you are looking for a business loan, as you will need to ensure that the following 5 items are balanced before you can receive a capital raise. So if you are thinking about how to get a working capital loan, then you need to read this article.
1. Taxes Payable
We must pay our fair share, but the tax laws exist for the benefit of small business owners. I realize some of you are doing a double take after reading the previous sentence, but it is true. The tax code helps small business owners to offset the investments they have made in their business in the form of tax credits.
While filing taxes is cumbersome, a good accountant will be able to guide you through the process. If taxes aren’t done correctly, then you are leaving money on the table and this gets me to the flip side of the tax equation, which is failing to properly account for sales tax.
Many small business owners see this as free money, but don’t fall into this trap. You are collecting sales tax on behalf of the government and they are expecting to get paid. Furthermore, tax liability could sink your chances to raise the capital you are looking for.
Your employees want to get paid on time and investors want to make sure that your books properly account for payroll. This includes salary, taxes, and benefits. Failure to balance your payroll accounts may not only undermine your chances of getting the funding you seek, but it could lead to issues with your employees and a bad reputation as an employer. Don’t let this happen to you, get a payroll system in place and use it. Doing so will give you more transparency and control of this important line item.
3. Accounts Receivable
Up to this point, we have talked about two important liability accounts, but now I want to focus on one of the most important items on the asset side of your business’ balance sheet – Accounts Receivable.
In the simplest terms, your Accounts Receivable is the money your customers owe you for the goods or services they bought from your company. One key to raising capital is to not only make sure that this account balances, but to make sure that account aging and overdue payments are not an issue.
Most lenders or investors will want to know the percentage of receivables which fall in the 30, 60, and 90-day periods. This is called account aging and the longer the period, the higher the risk. Not only will you need alternative sources of working capital, but the risk of nonpayment goes up. In fact, managing Accounts Receivable is such a problem that President Obama launched an initiative in 2014 to ensure small businesses were paid on time.
4. Shareholder Loans
Shareholder loans are a big red flag to potential investors and lenders. Either they will see it as a balance sheet manipulation or it is a sign that the business is losing a tremendous amount of money and the business owners are drowning while trying to keep it afloat.
Even the IRS is looking at these loans, and tax courts have found that repayment of shareholder loans could be subject to employment taxes. While shareholder loans serve legitimate purposes, it is best to work with your accountant to make sure you are navigating the myriad of issues created by carrying shareholder loans on your books.
5. Financial Ratios
The outcome of key financial ratios is directly tied to the financial health of your business. Some of the most common ratios used to analyze a small business include current ratio, gross profit ratio, net profit margin, accounts receivable turnover, and if you are seeking a loan – debt-service coverage ratio.
While the current ratio looks at total current assets (mainly cash and receivables) to total current liabilities (accounts payable, taxes, short-term debt). The debt-service coverage ratio looks at the amount of free cash available to service debt (principal, interest, and fees) over a given period. In terms of a loan or a line of credit, this ratio is one of the key performance indicators for a lender as it will help to determine how much a lender will give you.
As you can see, having your books in order will keep you from getting into trouble with the tax man. In addition, it will ensure you have a good reputation with employees and will help lenders and investors to feel confident in your business.