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Polishing up your financial crystal ball

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The 2008/2009 financial year would have to be one of the most volatile for many years. What will 2009/2010 bring for SMEs? Some say it will be tougher and there will be more job losses and some say there will be great opportunities around. Whatever the next financial year brings, every business owner needs to plan for the worst and the best case scenario.

We’re hearing that bankers are becoming more demanding about lending applications and the information they need to base a lending decision upon. If you are applying for new funding or have loans coming up for renewal, lenders are likely to want accurate projections and cashflows, as well as recent financial statements.

Financial statements

Your financial statements can make or break your lending application. Bankers will run your financials through a diagnostic to calculate the health of your business. This will include both the profit and loss statement and the balance sheet. So it’s vital your financial statements are accurate. We occasionally see accounts with inaccurate treatment of transactions that can really throw out the validity of the reports and negatively impact a lending application.

I would strongly recommend having your financials looked at by a professional prior to a lending application, to save time and disappointment.

Projections

If you were lending someone money you would want to feel confident they had the capacity to repay the loan with interest. That’s how bankers look at the future of your business. They want to be sure the business is healthy now and into the future.

When the subject of projections or budgets is discussed with business owners, we often get asked the question, “I don’t know what I’m going to sell, so how can I do a projection?”

Fixed Costs: Start with the fixed costs or overheads in the business. These are the costs that stay the same whether you sell anything or not, such as rent, administration/sales wages and leases, etc.

Variable Costs: You then need to know your gross profit margin and calculate the sales you need to make to cover the overheads less the variable costs to make the sales. Variable costs are those that are only incurred when you sell a product or service such as direct labour, materials or product purchases. If you put this into a spreadsheet you can then play around with the level of sales to see how much profit would be made if sales increase or decrease. You can also factor seasonality into the projection.

Sue Hirst is a director of CAD Partners, a nation-wide mobile CFO “On-Call”/financial control/business accounting service for SME owners.

Image: seanmcgrath (flickr)