Preparing financial statements so that financing is easier to obtain: numbers true to the facts, in a form you can explainHow to prepare "financial statements" so that borrowing money is easier
In assessing a loan, a financial institution checks the numbers in the financial statements and asks the owner about the background. To make financing easier to obtain, the basic approach is not to make the numbers look good but to put numbers that are true to the facts into a form you can explain logically. The Guidelines on guarantees by business owners also cite clearly separating the assets and accounting of the corporation from those of the owner personally, and disclosing financial information in a timely way, as preconditions for lending that does not rely on guarantees. This article sets out general points to look at when preparing financial statements.
- ○Applies: The company's money and the owner's personal money are separated
- ○Applies: Assets whose use is unclear (such as loans to officers) have been sorted out
- ○Applies: Depreciation is booked as the rules require
- ○Applies: The existence of accounts receivable and inventory and the prospects of collecting them have been checked
- ×Does not apply: Rewriting the numbers to make profit look larger
Key points
- Separate the corporation's money from the owner's personal money. For assets whose use is unclear, such as loans to officers, suspense payments and amounts paid on behalf of others, sort out what they are and be ready to explain the plan to collect or settle them
- Book depreciation as the rules require, even in a year with little profit. Financial statements that skip depreciation look as if the numbers differ from reality
- For accounts receivable, inventory and loans receivable, review whether they actually exist and whether they can be collected or sold. Do not keep carrying items that are hard to collect
- Prepare monthly trial balances and be able to explain how the numbers in the financial statements move in connection with the business plan (sales, profit and the repayment plan)
- Do not make the numbers in the financial statements differ from the facts (window-dressing). Submitting financial statements that differ from the facts in a loan application may expose you to charges such as fraud
What to do in practice
- List loans to officers, suspense payments, amounts paid on behalf of others, long-uncollected accounts receivable and the like, and summarize what they are and the plan for settling or collecting them
- Use the free tool "Financial indicator check for financial statements" to check the equity ratio, the number of years to repay debt and the actual equity ratio
- Prepare a memo that can explain, based on the facts, how the numbers in the financial statements moved (why profit rose or fell, how borrowings were used), and consult a tax accountant on anything unclear
Financial statements are documents that sum up a company's results for a year and the state of its money, and a bank looks at them when it considers whether to lend. What matters is not making the numbers look good but putting the truth into a form you can explain properly. Preparations such as separating the company's money from the president's personal money and sorting out loans and borrowings whose purpose is unclear are useful. Fudging the numbers must never be done.
- 1. Sort outSeparate the company's and the individual's money and sort out money whose purpose is unclear
- 2. CheckCheck whether the accounts receivable and inventory really exist and whether they can be collected or sold
- 3. ExplainPut the reasons for the movement in the numbers and the plans from now on into words
Points
- Separate the company's money and the president's personal money properly
- For "money lent for a purpose that is not clear", sort out what it is so that you can explain it
- Rewriting the numbers is wrong. Be able to explain the true numbers in an easy-to-understand way
What the words mean
- Loan to an officer
- The part not yet repaid when the company has lent money to the president or another officer
- Depreciation
- Spreading the cost of a building or a machine over the years of its use and turning it into an expense little by little
- Window-dressing (funshoku)
- Making the numbers in financial statements differ from the truth so that they look better
- Small and Medium Enterprise Agency: Small and Medium Enterprise Agency, Guarantees by business owners (Guidelines on guarantees by business owners)
- Small and Medium Enterprise Agency: Financial Services Agency, On the publication of the "Guidelines on guarantees by business owners"
This article summarizes and explains materials published by government agencies and is not advice on any individual case. Rules can change, so for actual procedures and decisions always check the latest original materials and consult professionals such as tax accountants or labor and social security attorneys. English, Simplified Chinese and Traditional Chinese versions are translations prepared from the Japanese articles for convenience. If anything differs, the Japanese text and the original source take precedence.