Financial statements for business borrowing

The principle

A balance sheet presents assets, liabilities, and equity at a particular date. An income statement reports revenue and expenses over a period. A cash flow statement explains cash movement through operating, investing, and financing activity. Together, they help a lender understand capacity and obligations more clearly than a bank balance alone.

Put it into practice

Prepare comparable periods and current interim results. Reconcile large differences between year-end statements, tax information, and management reports before sending the file. Label the accounting period and currency. Explain acquisitions, unusual revenue, owner transactions, and changes in accounting treatment that affect comparisons.

What people often miss

Preparation standards vary. Internally prepared, compiled, reviewed, and audited statements do not provide the same level of assurance. Ask which format the lender needs rather than paying for unnecessary work or submitting something insufficient. A profitable income statement can coexist with cash strain if receivables grow, inventory builds, or debt principal consumes cash.

Give each statement a different job

Think of a small wholesaler that reports $30,000 of annual profit. During the year, receivables increase by $45,000, while unpaid supplier bills increase by $10,000. Assume no other adjustments for this simplified example. Starting from profit, subtract the extra receivables and add the supplier credit: $30,000 minus $45,000 plus $10,000 equals negative $5,000 of operating cash flow. The profitable trading result did not become cash during the same year.

The income statement explains the profit, the balance sheets show the changing receivables and payables, and the cash flow statement connects those changes. The next question is operational: when will customers actually pay, and when must suppliers be paid? Sending only the profit page conceals that question. Sending only a bank statement shows a balance without explaining how the business produced it.

Source: BDC: financial statements

Build a file that can be reconciled

Use a cover sheet listing the legal borrower, statement dates, currency, preparer and accounting basis. Include the full statements and notes, not cropped screenshots of favourable totals. If an accountant has subsequently adjusted management accounts, preserve both versions and explain the bridge. For a group of companies, identify whether the numbers are consolidated and whether a lender is evaluating the same entity that owns the relevant assets.

A lender's document request should guide the assurance level you obtain. An internally prepared report, compilation, review engagement and audit are different services; do not describe them as interchangeable or label management figures audited. Before ordering more work, ask what is necessary for this transaction and when it must be updated. A practical monthly routine is to reconcile the bank, receivables, payables and debt balances, then investigate material changes. That creates a more dependable application than a last-minute document collection. Retain the preparer's report and all accompanying notes.

• Do all statements cover the same borrower and consistent periods?
• Can reported debt balances be matched to lender statements?
• Are notes and related-party balances included?
• Which missing schedules would explain the biggest movement?

Source: BDC: business loan checklist

Your next-step checklist

• Complete statements with dates and currency
• Current interim comparison
• Explanation of unusual or nonrecurring items
• Requested preparation and assurance level