Mr. Ching Chee Pun (chartered accountant and SME Funding Consultant) shared about how a business accounting treatment affects business loan application and credibility.
Watch this video: How Profit and Loss statement shows the healthy growth of your business that ultimately make it easy to get financing for business expansion.
Everybody knows what an Income Statement is. It is:
Net Profit = Sales – Cost of Sales – Company Expenses.
Normally, a bank, or an investor, or a lender likes to see an increase in sales and profit, but a decreasing trend on sales and profit doesn’t mean that your loan will be rejected. Of course, we are going to have to justify why our profits and sales decreased.
Although, the natures of our businesses differ, if possible, we try to have an uptrend. That’s why we work hard on our businesses. We try to make sure that every year our sales go up and that our profits go up.
When everything is up, everybody loves it and your banker loves it, your investor, and even your tax agent loves it. This is because you are showing the consistent growth of your company.
But, let’s say you have this decreasing trend: your sales go down, your profit goes down. You have to then do a lot of things to justify this trend to the banks. When your sales or profit goes down, you’re going to look for money to rescue your company.
The banks will be more careful in dealing with you at this time because you’re not doing very well and you are running to them for help. These banks are going to think twice about lending money to you.
When your sales are doing well, it is the other way around. Banks want to lend more money to you. They hope that you do even better so that they can make their interest back while also making a profit. Otherwise, if your company isn’t doing well, somehow, they make it difficult for you.
When your sales or profits go down, the banks would start cutting down the facilities. I have a case and this is a real case, with a company doing a water heater business. The company is not doing well and the sales are dropping.
Initially they had a bank facility of RM 3 million. The sales started dropping for the past three years. On the third year, the bank said to the company owner, I’m going to reduce your facilities to RM 1 million. They have cut their life line from RM 3 million to RM 1 million.
You see, in this situation, the company should know, because when you are doing well, the bank support you, but you are down, the bank withdraw their support, so we have to be careful when doing business.
For Founder Method members, you can Watch the full webinar below for more info on accounting treatment.
