When it comes to dealing with bankers and creditors, the reality of life is that your credit lines and loan rates may all depend on how your company looks on its year-end statement. If you are thinking that your year-end was four months ago and what’s done is done and there’s nothing you can do about it, think again.
What your CPA puts on each page of your financial statement matters greatly. Your CPA has lots of choices — choices about details, years to present, the verbiage and format of your notes, and more. If your CPA firm is on autopilot, your statements will be done the way they were in the past or like all their other clients. This may not be the best for you.
Your goal for your year-end statement is to reflect your company in its best light without being dishonest in any way. The only person who can make sure that happens is you, working closely with your CPA. Here’s how to make it happen:
Number of years presented in statement – Your CPA can show one, two or three years of your operations in a single statement. If your company is growing and becoming more profitable, use two or three years. If last year was a profitable year, but not as profitable as two years ago, show only one year. If you lost money last year, but made money two years ago, show both years but include a management letter explaining the loss and what you are doing (or have done!) to correct the problem so this (or next) year will be profitable.
Amount of balance sheet detail – The fewer account line items in your basic balance sheet statement, usually the better. In particular, I like to “bury” supplier-required deposits and cash value life insurance in “Other Assets.” Remember that just about anyone can get hold of your statement information, including competitors. The best rule of thumb is to consolidate details you may not want them to see in fairly innocuous descriptions like Miscellaneous and Other.
Amount of income statement detail – The basic income statement should be very brief and contain only one dollar amount for each of the following items: Sales, Product Costs, Gross Profit, Operating Expenses, Operating Profit, Non-Operating Income, Interest Expense, Non-Operating Expense, Net Profit Before Tax, Taxes and Net Profit.
Everything else (all details) should go in separate schedules. Again, watch the categories you use in your schedules, revealing only descriptions that work in your favor or what your CPA says is necessary to meet GAAP (generally accepted accounting principles) requirements.
Notes – Be sure you read them and edit them! From the basic statement about what your company does to the details of loans, the notes section can heavily influence a creditor. For instance, you are the named party in a small, petty lawsuit. Does your CPA make a big note about the suit? He shouldn’t! A small statement buried in contingencies about normal course of operations litigation should do the trick.
When it comes to loans, some CPAs become obsessed with presenting each individual loan and all its details. Do you really want four pages of little equipment loans? Instead, ask for a single item for all the loans that says something like “Term loans for operating equipment with maturities from (month/year) to (month/year) with interest rates tied to the prime rate. Total payments X per month, etc.” This way, you have one lump sum instead of pages of loans.
Affiliate/Shareholder Transactions – You want to downplay these transactions as much as possible. If they must show up on your financial statement, do it in the least conspicuous manner your CPA will allow.
Disclosure of Interest Rates – Some CPAs will present statements using payment information without rates. This is my preference, but it is in the gray area of accounting principles. Not disclosing rates is very helpful when your existing rates are high and you are trying to obtain lower rate financing from a new bank. Some CPAs, however, are very staunch about revealing rates and won’t budge on this issue.
Request some statements be printed without notes and schedules – There are some folks who will want just a simple financial statement without details during the year (or you don’t want them to have all the details!) By preparing a “plain vanilla” statement, you will satisfy their need.
Have a frank discussion with your CPA about your year-end statement needs and ideas. Then ask to see a draft copy before the final printing so the two of you can discuss the fine-points. If you find your CPA is not willing to work with you to present your company in its most favorable light, you likely need a new professional. There are many competent CPAs willing to accommodate your needs who would love to do business with you. A good CPA can be a valuable asset to your business.
