How strong your company looks on paper at year-end is critical. Suppliers, bankers, and leasing companies will decide how much credit your company deserves and at what rate based on your company’s financial condition at year-end. If you anticipate needing new financing in the coming year, or needing a larger supplier line or simply want to reduce your interest rates, you should make your statements look their very best. Here’s how.
First, anyone who reviews your financial statement usually goes right to the bottom-line. Therefore, be sure they find at least a small profit! If you show any loss (even if the loss is purely for tax minimization purposes), that loss raises immediate concern.
Typical ways to prevent a loss are:
• Delay discretionary expenses until January.
• Reduce officer salary.
• Eliminate or delay end-of-year bonuses.
• Sell old, fully-depreciated, non-producing assets for book gain.
• If using accelerated depreciation, consider changing to straight-line. (Always consult a CPA before making this type of change.)
If after using these strategies, a loss is unavoidable, attach a letter to your financial statements explaining the loss. Some generally accepted reasons for losses are:
• You took a large officer bonus to avoid double taxation in a c-corp. (Lenders will usually want an owner’s personal guarantee, however, if all the profits are being diverted out of the company.)
• There was large depreciation due to the purchase of lots of new assets.
• There was an extraordinary non-recurring expense such as one-time remediation, attorney’s fees, law suit settlement, etc.
After checking your bottom-line, most persons reviewing your financial statements will next check your cash balance. Why? Well, remember who looks at your statement — bankers and suppliers. And they know it’s cash that pays off loans and trade lines. The more cash you have in the bank, the more safe and secure they feel.
If you are like most family business owners, you may think that producing a large cash balance at year-end is an impossible task. Once you consider, however, that a balance sheet is only a single day in time, it becomes much easier. Here’s how you achieve a large cash balance on that one day:
• Reduce inventory – Run your inventory as low as you can on December 31. Restock the first day of the new year.
• Collect receivables – Start informing (in a nice way!) your customers that you will be appreciative of especially prompt payment in December. (Some customers are actually cooperative about paying.) Consider sending someone from your staff out to pick up checks on the last two days of the year to avoid mail time. For larger businesses, the extra collection effort can translate to hundreds of thousands of dollars in cash.
• Sell off non-producing assets – If you have equipment, trucks or buildings that aren’t being used to produce income, sell them before year-end. Try for 100% cash terms with the sale since it’s cash you’re trying to boost.
• Maximize accrued expenses – When you accrue expenses, they show up in the current year’s expenses (saving taxes) but don’t get paid until later (next year). This means you get to keep the cash on your year-end statement! Easy items to accrue are shareholder compensation, end-of-year bonuses, and rents paid to related parties.
• Delay supplier payments – If you have a December 31 EFT payment due, check with your supplier to see if they will accept payment the first business day of January instead. Caution – Only use this strategy if your company’s current ratio will be 1.2:1 or more with the extra payables. Never stretch payables to more than 29 days average payment time (average daily cost of goods sold times 29 days).
• Collect any shareholder or affiliated company receivables – Most creditors ignore these assets as worthless anyway, so, why not put the cash back into the company where it will do some good? You can always take it out again in January.
• Finance the year’s fixed assets purchases – Many family businesses pay all cash for fixed assets throughout the year. Consider asking your bank to finance those purchases right before year-end on a long term loan. As long as you request a variable interest rate, there should be no prepayment penalty if you want to pay off the loan in January. You will end up paying only minimal interest to have a healthy looking cash balance. Caution – Only use this strategy if your equity is at least 25% of total assets.
After a quick check of your profit and cash, expect a check of your current ratio. Current ratio is current assets divided by current liabilities. Creditors like to see a ratio of 150% assets to liabilities or 1.5:1 in the small business world.
Balloon payments on term loans can wreak havoc on your current ratio. If you have any large term loans with an early expiration date before year-end, get them extended or refinanced before 12/31.
Finally, try to clear off any contingency items that would be footnoted on your financial statements. This might be an environmental situation or a law suit. The “cleaner” your financial statements and the fewer red flags, the better.
If you have at least a little profit, ample cash, a good current ratio and no contingencies on your year-end December 31 financial statement, you should be well-positioned to obtain favorably-priced financing and larger supplier trade lines.
