Part 3 – Providing Detailed Financials and Operating Data History

Over the course of this 4-part series, the first two blogs covered the overview of the 5-step process and went into depth regarding the first two steps of the process. This blog covers the third and fourth steps which are usually the most difficult for smaller or medium sized businesses, that is, providing detailed financials and the operating data history to back up your forecasts. This can feel daunting. Folding that history into a detailed forecast is even more difficult as you must document your assumptions for trend changes.

Providing historical financial statements (income statement, balance sheet and cash flow) is just the beginning. Funding sources will also want to know who are your key customers, key suppliers, and how much business was transacted over time. They will also want to know your gross margins by product, service offering and client. In short, they want to know how and where you make your profits. If you are a manufacturer or distributor, they will want a great deal of information on your inventory turns, inventory obsolescence and scrap rates. You don’t have to have audited financial statements if your credit request is small (under $1,000,000) but your supporting data must be sufficient to convince the lender that the data is likely correct. Larger credit requests will require audited financial statements or at least reviewed statements if asset coverage greatly exceeds the loan amount.

Taking the historical data mentioned above and turning that into a three-year forecast often perplexes business owners. But any business owner can understand when a banker asks how you plan to get from point A to point B to point C. This forecast process is most often done through Excel spreadsheets and has a detailed explanation of assumptions, ratios and formulae attached. Recipients will pay specific attention to changes in trends, causes for the changes and variability of profitability. You will likely be asked to run multiple scenarios for risk sensitivity assessment.

Do not despair because these tasks are not impossible and many well-run companies already have these processes in place. You start by having a sales forecast with assumptions on customers, pricing and timing of sales. Your cost of sales will flow from this and should include your gross margin assumptions. Funding sources will focus on these areas for reasonableness before looking at anything else. If they don’t believe the top line and sustainable gross margins, the rest of your data does not matter.

Loan applications vary by lending institution but generally require the same information. The format often follows the format used by the SBA (Small Business Administration) as a potential short cut if the SBA gets involved. By reviewing the loan package requirements, you will be able to plan your efforts. For example, in addition to financial history and forecasts, they will want copies of key documents. These are lease documents, customer contracts, supplier contracts, notes or debt instruments outstanding, partnership agreements and other legal documents that spell out obligations or ownership rights. In some case the business owner will also need to provide personal financial statements in case a personal loan guarantee is required. (It is always required on SBA backed loans.)

The loan application prescribes the formats for financial data history and forecasts. Your spreadsheet formats should reflect these formats if at all possible to speed the process. Additional supporting data can be included in pages in the workbook but main pages would be best presented in the requested format. Often this general format does not adequately present your business so the additional pages are critical. Discuss potential issues with the lender to determine how flexible they are – especially if your presentation format gives them better information to understand your business. You don’t get if you don’t ask. We often manage this entire process for our clients.

The final blog in the series discusses how to tie all of the steps into one package.

C Squared Solutions provides interim or fractional CFOs, COOs, and CEO advisors in nearly all industries. We analyze and advise on these issues frequently through sophisticated modeling and experienced management. Give us a call or visit our website for more information and details. We have been there and done that!

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