Broken Records – Broken Deals: why Good Data is Important.
OR
Why it is Sometimes difficult to Raise a Loan!
* Consider this – a hotel owner comes for refinancing. He is asked for last three years financials (surprise, surprise) and he hasn’t got any. He has month by month hotel stats, which are useful in themselves, but no consolidated income statement and balance sheets let alone anything year to date. His corporate taxes are delayed – why – lack of consolidated records. Nice hotel though and going gangbusters.
* Or consider this. An owner of several (actually about 17) assisted living facilities. Again, though he has records on individual operations, he has nothing on a consolidated basis suitable for assessing the corporate or overall situation. Difficult to arrange financing on this scenario.
* Then again, take our corner convenience store. Good business, lots of cash transactions. Owner wants to sell, has a willing buyer, but guess what? Records show a lousy financial performance. Too much skimming of cash.
I am continually surprised at the number of businesses I come across while trying
to raise finance for them that have really poor financial records systems. Or which
have sloppy habits in recording true activity, which may benefit them in the short
term but when it comes to arranging finance or wanting to sell, bites them in the
you-
* In any business, records are essential. Some records are necessary for regulatory bodies – such as labor boards, workers comp regs, etc. Most are needed for tax authorities, but all are necessary for controlling the business. Especially financial records. Here are some thoughts about the financial records you should have which will not only help owners understand their businesses, but which will allow commercial mortgage and financing brokers to successfully do their jobs.
1 Keep them current. Lenders want to know what’s happening now, as well as a
year ago. A year ago success may have been evident. Today the business may be tanking.
Or almost more importantly, the opposite may be true – a year ago things were not
good but hey guys, look how we’ve improved. Financial performance should be capable
of being summarized on a monthly basis with year-
2 Keep them clean. By this I mean only include in your business revenue and cost structures only those items that are strictly relevant to business activity. So no putting the purchase of your Jaguar through the books. This not only drains your cash but does not accurately reflect a business’s health. And that means your bottom line is reduced and your debt capacity with it.
3 It pays to be honest. The cash the business takes that doesn’t get recorded is the cash which, if properly acknowledged will show the true value of the business for a sale, and the necessary cash flow for a financing transaction. Without it you are trying to sell a dog, or trying to finance a failure.
4 Resist the temptation to expense everything. Capitalizing major items is good for the bottom line, at least in your operating (as opposed to your tax relevant) statements. While expensing may help your tax situation, it plays havoc with your bottom line. Remember we need to show the best possible bottom line for financing or sale purposes. Treating capital expenditures as such helps to keep the bottom line healthy.
5 Have a line item somewhere in your accounts called “Non-
I’m sure my colleagues could suggest many other items in addition to the above to make records better and more able to help reach financing goals. These are the ones that have recently made my life more difficult as a finance Broker, and unfortunately keep appearing on a regular basis.
Truly sounding like broken records.