We should be fully aware about things related to accounting before we plan to apply a loan. In general, it is important to prepare financial reports before we could get a loan and they may include cash flow statement, balance sheet and income statement. Our income is a clear indication of how our financial situation is performing, especially after we compare it with expenses. In this case, income statement is directly equal to performance. Once we are able to accurately present income statement, lenders will know what’s going on with our finances and why we need the loan.
By preparing our income statement, we will be able to make some changes that can improve our bottom line to improve our chance of obtaining the loan. As an example, we would know whether our products are performing well and what we should do to make our business more profitable. We will know whether we have the right pricing and whether we can reduce overheads. Everything we do should be in line with existing industry standards. It should be quite easy to find black holes that have ruined our profits. Then, there control issues that can’t be solved effectively without accurate income statement.
Income statement should allow us to forecast whether our business is profitable or not. This should be similar to taking a significant step forward, especially for companies that haven’t set up their income statement yet. Business owners should be much more at ease knowing that their finances are under control. While income statement could tell us about our profitability, it should also allow us to define proper strategy. We also need a proper balance sheet to better understand about assets that we use to operate our business. Like with income statement, balance sheet also offers a way to better understand our sources of income, no matter small or big our business is. Balance sheet should be consisted of two major categories: assets and liabilities. Assets should be a reflection of what we own in our business, while liabilities tell us how much we owe. By providing lenders with our income statement and balance sheet, we should be able to convince them that we have a reasonably smooth business operation.
Another thing that we need to include is details about our cash flow. We use specific amount of capital to finance and operate our business. Cash flow should allow us to determine whether we have proper level of debt and whether our debt is detrimental to the smooth running of our business. This should be where cash flow statement starts to become quite handy. The statement is essentially a financial report that tells lender about our ability to pay back our debt in the future. Lenders will be able to see how much money we have left after all expenses incurred. This is a critical factor when lenders decide whether we are eligible for loan or not. We should also be able to find out whether our cash inflow is sufficiently strong.
