The Silvano Group

THE IMPORTANCE OF GOOD RECORD KEEPING

    As the owner or manager of a small business, you invest tremendous time and energy to ensure your company’s success. You want the greatest possible return on your investment, and good financial records can help.

  Your Key to Success Is Information

    Think back to the steps you went through to open your business. From the start, you’ve done everything right. You invested a tremendous amount of time in gathering information – about your abilities, finances, market, customers and competitors.

    You understood why you wanted to go into business – the opportunity to be your own boss, a desire for financial independence, the freedom to set your own course.

    Then you chose the business “right” for you. And, more importantly, your market research showed that your particular “business dream” was in demand.

    You then took all this information and developed a business plan- the same business plan that helped you get the loan you needed to open the doors. You demonstrated your business skills to the bank stating precisely how much money you needed, why you needed it, and how you were going to repay it.

  What Went Wrong?

    While it’s true that success often brings success, it’s equally true that success often breeds failure – particularly for a small business.

    That’s because as a business begins to grow rapidly, the owners often work frantically to simply meet demand, minimizing the time they devote to keeping good records.

    If escaping paperwork was one of your reasons for starting abusiness, it is critical that you hire someone to perform the necessary task of keeping your financial records. Although you must pay for these services, bear in mind that solid financial advice frequently can increase your profits, more than covering the professional fees.

    Good records will help you answer important questions about your company’s financial health. What’s really happening in my business? Why is cash flow always a problem? How much is real profit anyway? If you’re not exactly sure, then it’s time to return to the basics – the basics of good record keeping.

  WHY?

    Simply put, a small business that fails to keep complete and accurate financial records places its long-term success and survival in grave doubt.

Complete and accurate financial record keeping is crucial to your business success. Here’s why:

 1.   Good records provide the financial data that help you operate more efficiently, thus increasing your profitability. Accurate and complete records enable you, or your accountant, to identify all your business assets, liabilities, income and expenses. That information, when compared to appropriate industry averages, helps you pinpoint both the strong and weak phases of your business operations.

 2.   Good records are essential for the preparation of current financial statements, such as the income statement (profit and loss) and cash-flow projection. These statements, in turn, are critical for maintaining good relations with your banker. They also present a complete picture of your total business opera tion, which will benefit you as well.

 3.   Good records are critical at tax time. Poor records could cause you to underpay or overpay your taxes. In addition, good records are essential during an Internal Revenue Service audit, if you hope to answer questions accurately and to the satisfaction of the IRS.

  What Exactly Will the Records Tell You?

 The following checklist highlights the type of information your financial records should provide to assure your success:

*  How much income are you generating now, and how much income can you expect to generate in the future?

*  How much cash is tied up in accounts receivable (and thus not available to you), and for how long?

*  How much do you owe for merchandise? Rent? Utilities?     Equipment?

*  What are your expenses, including payroll, payroll taxes, merchandise, advertising, equipment and facilities maintenance, and benefit plans for yourself and employees (such as health insurance, retirement, etc.)?

*  How much cash do you have on hand? How much cash is tied up in inventory? What is your actual working-capital budget?

*  How frequently do you turn over your inventory?

*  Which of your product lines, departments or services are making a profit, which are breaking even, and which are financial drains?

*  What is your gross profit? What is your net profit?

*  How do all of the financial data listed above compare with last year – or last quarter? How do they compare with the projections in your business plan?

*  How do all the financial data compare with those of your competitors? With those of the industry?

  While your review of this checklist may have uncovered some glaring deficiencies, it’s never too late to correct problems related to poor record keeping. It may take a bit of time and effort to ana lyze the company checkbook, take inventory, review bank statements and, in general, catch up on your paperwork.

  It is essential, however, that you make the effort to determine the precise financial condition of your business. It is as critical as maintaining good customer relations.

  What to Look for in an Accountant

  Let’s assume you follow the path of many successful entrepreneurs and seek professional assistance from an accountant. How do you find an accountant who is knowledgeable, capable and discreet? You should seek an individual with high ethical standards who is a respected member of the community.

  Due to the ever-changing complexities of tax laws and developments in accounting methods, the accountant must keep up. Look for an accountant who takes advantage of educational seminars, professional publications and other continuing education opportunities.

  You will probably want your accountant to assist you not only as a record keeper, but also as a consultant and financial advisor who understands your business affairs almost as well as you. Seek out an accountant with broad experience and a well-rounded education.

  Professional accountants are listed in telephone directories under accountants, public accountants, bookkeepers and tax preparers. Look for references or recommendations from local business associates, your banker or attorney.

  The Basic System

  A basic record-keeping system, whether on paper or an off-the-shelf computer software program, should be simple to
use, easy to understand, reliable, accurate, consistent and designed to provide information on a timely basis.
It needs:

*  A basic journal to record transactions (receipts, disbursements, sales, purchases, etc.)

 *  Accounts receivable records

 *  Accounts payable records

 *  Payroll records

 *  Petty cash records

 *  Inventory records

  An accountant can develop the entire system most suitable for your business needs and train you in maintaining these records on a regular basis. These records will form the basis of your financial statements and tax returns.

  Without knowing where your business is financially, you may be forced to close or sell, despite an excellent customer base. You could find yourself in this trap if -

*  your cash flow is desperate.

 *  you are unable to pay creditors.

 *  too much of your cash is tied up in old inventory and accounts receivable. Sure, owning a business places tremendous demands on your time. It’s easy to let things slip. Resolve now to avoid the trap of letting the books wait until you are less busy … or more rested… or have time to start and finish the job all in one sitting… or ….

   Make a pledge now to maintain your records and assure your success!

  For More Information

  Information is power. Make it your business to know what is available, where to get it and, most importantly, how to use it.

 Sources of information include:

 U.S. Small Business Administration

 *    SBA District Offices
 *    Small Business Development Centers (SBDCs)
 *    Service Corps of Retired Executives (SCORE)
 *     SBA OnLine (electronic bulletin board)
 *    Business Information Centers (BICs)

  The SBA has offices located throughout the United States. For the one nearest you, look under “U.S. Government” in
 your telephone directory.
 You also may request a free copy of The Resource Directory for Small Business Management, a listing of for-sale publications and videotapes, from your local SBA office or the SBA Answer Desk.

  Other Sources

 *  State economic development agencies
 *  Chambers of commerce
 *  Local colleges and universities
 *  Libraries
 *  Manufacturers and suppliers of small business products and services
 *  Small business or industry trade associations

  Did you know the SBA …

*  Has a portfolio guaranteeing over $27 billion in loans to 185,000 small businesses that otherwise would not have had such access to capital?

*  Guaranteed over 60,000 loans totaling $9.9 billion to America’s small businesses in fiscal year 1995?

*  Last year extended management and technical assistance to nearly 1 million small businesses through its 950 Small Business Development Centers and 13,000 Service Corps of Retired Executives volunteers?

*  Provided more than 45,000 loans totaling $1.2 billion to disaster victims for residential, personal property, as well as business losses in fiscal year 1995? Has 7,000 private sector lenders as partners providing their capital to small business?

*  Has increased its venture capital program with more private capital in the past two years than in the previous 15 years combined?

*  Provides loan guarantees and technical assistance to small business exporters through U.S. Export Assistance Centers in 15 cities?

  Did you know that America’s 22 million small businesses …

 *  Employ more than 50 percent of the private workforce,
 *  Generate more than half of the nation’s Gross Domestic Product, and
 *  Are the principal source of new jobs?

  All of the SBA’s programs and services are provided to the public on a nondiscriminatory basis.

Borrowers seeking bad credit commercial loans have basically three options.     However none of these options are ideal. They are money loans, commercial hard money loans and SBA 7a Loans And due to the credit crisis these options are becoming more and more limited.  Never before has personal credit been so important for commercial loans. 

This may seem painfully obvious, but worth noting that everything should be done by the borrower to restore/improve their personal credit score.  Commercial loans with bad credit are very expensive and also very hard to get funded in this market.  We are currently in one of the worst credit crisis’s since the Great Depression and banks are getting very conservative.  Credit scores are very easy for banks to identify and “pick on” 

As far as the expense, the difference in payment on a $1,000,000 loan amount  with a rate at 7% (is $7,067) vs 9% (at $8,391) is significant.  That a  $1,324 per month increase, or:

• $15,891 per year increase in payments, or
• $79,497 increase in payments over a 5 year period

Thats real money, cash out of your pocket…  Thats not potential equity build up, or principle paydown, etc but real cash out of your hands.  And this does not include the other costs to do loans.  For example, SBA 7a loans normally have a 2.75% “guarantee fee” which are points the Small Business Administration charges.  On a $1,000,000 loan amount that would be $27,000 in fees you would have to pay.  Hard money is more expensive.  Expect to pay 4-6%, again thats $40,000 – $60,000 in fees just to close the loan.  

Business Loans & Grants

The U.S. Small Business Administration (SBA), the federal agency created specifically to assist and counsel small businesses, suggests the following sources of business capital in addition to :

1. Finance Companies
2. Mortgage Companies
3. Frieds, Relatives, Individuals
4. Government Agencies (such as SBA)
5. Banks
6. State Government Financing Sources
7. Savings and Loan Associations
8. Insurance Companies
9. Small Business Investment Companies
10. Venture Capital Firms
11. Pension Funds
12. Private Foundations

Types of Business Loans

Banks and other financial institutions can assist you by providing business loans through personal or commercial credit. Examples of personal credit include credit cards, and home equity loans. Commercial credit includes business loans; here are some of the options:

Short-term business loans are one of the most common types of business loans and are usually for less than one year. They can provide interim working capital for a business temporarily in need of cash, and are typically repaid in a lump sum when inventory or accounts receivable are converted into cash.

Intermediate-term business loans are often used for a business start-up, the purchase of new equipment, expansion, or an increase in working capital. The maturity dates range from one to three years.

Long-term business loans generally are made for major capital improvements, acquiring fixed assets, or business start-ups. The term of the loan runs for periods of three to five years and is usually based in part on the life of the asset financed. Repayment is usually made in monthly or quarterly installments.

A line of credit offers you the ability to borrow money repeatedly, up to your credit limit, without having to re-apply. A line of credit is particularly important to businesses that experience seasonal fluctuations.

The Business Loan Application Process

Among the best assets you can bring to the lender is a well thought-out and documented business proposal. You need to clearly state the purpose of the loan (will the money be used for temporary working capital, buying equipment, or expanding facilities); the amount of funds needed and for how long; and a repayment schedule. Your business proposal should include the following information:

business description that tells the nature of the business, describes the product and its market, identifies its customers and competition.

personal profile that outlines the background and experience of each of the principals in a resume.

proposal that states the type of loan requested and its purpose.

business plan that outlines your corporate strategy for the next three to five years; it will aid you and the lender in determining whether the business will generate the cash flow needed to repay the loan.

repayment plan that tells how you propose to repay the loan or outlines a repayment schedule. The lender will be expecting you to repay the borrowed funds from the profits produced by the business. As a contingency, you might need to develop a plan on how you would repay the loan if the profits alone turned out to be inadequate.

supporting documentation will include copies of pertinent papers that support the information contained in your loan proposal-for example, a lease, certificate of incorporation, partnership agreement, letters of reference, contracts, invoices or vendor quotes.

collateral that you will use to secure the payment of the loan. Collateral can include business and personal assets such as inventory, equipment, and accounts receivable or real estate, stocks, bonds, and automobiles. Financial statements, both personal and for the business. It should contain a balance sheet showing business assets and liabilities, and a profit-and-loss statement showing revenues and expenses. You should be prepared to provide copies of your personal tax returns. You may be asked for a list of credit references. Lenders will check your personal as well as your business credit rating.

Lenders will carefully examine your financial statements and business projections. As a borrower, you must be fully prepared to answer questions about them.

personal guarantees of the owners or other principals usually are required, even from an established business. The lender also may request another party’s guarantee such as a cosigner or a surety, or may request a government guarantee from the U.S. Small Business Administration or other government agency.

In the case of secured credit, the lender is allowed to obtain a spouse’s or other co-owner’s signature on certain documents when the applicant offers, as security for the loan, property that the two own jointly. In this case, the spouse or other co-owner may be asked to sign documents—such as a mortgage or other security agreement that would be necessary under applicable state law to make the property available to satisfy the debt.

When valuing a business for sale, start by reviewing basic financial statements.

Example: A husband and wife have been working in his father’s small business for almost four years now. They would like to buy his small business from him. It is a independent copier/fax dealership located in a small town.

They know the market potential and that his accountant has taken advantage of all of the possible loop-holes to shelter him from taxes. This will be the first year that the financials will depict a (pretty close) picture of the company. How do they evaluate the company and gain a fair evaluation of what they should offer him for his company?

Two major financial statements should be reviewed with their accountant, the balance sheet and the statement of income and expense.

The Balance Sheet should show how the assets, liabilities and net worth of the business are valued. Items shown on the Balance Sheet may not tell the entire story. For example, is the equipment valued realistically? The equipment may be obsolete despite what is shown on the statement. Are the accounts receivable fully collectable? Also, the liabilities may not reflect contingent liabilities, such as a pending lawsuit or potential tax liabilities. These are just a few of the many questions you must ask to determine true value of a business.

Looking at the next important financial statement is the Statement of Income and Expense (also called the Profit and Loss Statement). Are the sales correctly reflected? Unfortunately, many businesses dealing with cash do not deposit all the sales receipts. If so, how can the seller prove the correct sales? Or, when anticipating selling the business, the sales may be overstated. The expenses may contain personal items that are not business related. The point I am trying to make is that you need an experienced CPA or business appraiser who represents your interests to represent you when buying a business.

In this example we may be dealing with a father who is trying to help his kids as fairly as he can. He may be willing to agree to terms that will not be a strain on their finances. We may also assume that in retirement, he would like to have an ongoing income stream from the business. Since the business shows good prospects for the future I can envision structuring a deal that is beneficial to both of them. The idea is for the buyers to give as small a down payment as possible to afford them maximum working capital.

A percentage of the gross sales or net profits can be paid out to the father for a certain numbers of years. Using such a formula will enable him to benefit by any future growth in the business. To arrive at a total payout amount would, of course, require knowing a lot more information that the SILVANO GROUP will acquire. We ask all the right questions.