A. The company has adequate cash flow. ----- -----

1. Pre-numbered cash receipts are monitored and accounted for. ----- -----

2. Checks are deposited properly each day. ----- -----

3. Customer invoicing is done promptly (within two working days). ----- -----

4. Collections are received within 60 days. ----- -----

5. Accounts payable take advantage of cash discounts. ----- -----

6. Disbursements are made by prenumbered check. ----- -----

B. The company projects cash-flow needs. ----- -----

1. Payrolls are met without problems. ----- -----

2. Money is set aside for expansion, emergencies and opportune purchases. ----- -----

3. Short-term financing is used when needed. ----- -----

4. Line of credit is established with a bank. ----- -----

C. The company understands the role of financial planning in today's highly competitive lending markets. ----- -----

1. The owner's personal resume is prepared and current. ----- -----

2. Personal financial statements have been prepared. ----- -----

3. The business has a written business plan. ----- -----

4. Source and use of funds statements exist for the past two years, with a projection for the next two years. ----- -----

5. An accurate balance sheet exists for the past two years and includes a projection for the next two years. ----- -----

6. The owner has a good working relationship with a banker. ----- -----

A. The company has adequate cash flow.

Inflation and fluctuating interest rates have made it mandatory for small businesses to closely manage their cash flow. Given the added problem that many small businesses owe money, it is little wonder that an adequate cash flow is essential to the firm's health and financial stability. Businesses that are otherwise healthy can become insolvent simply because of poor cash flow.

1. Prenumbered cash receipts are monitored and accounted for.

The use of prenumbered receipts is the simplest way to keep track of customers and sales. It is also the source document for building the accounting system. Another reason for using prenumbered receipts is that they can reduce inventory shrinkage and reduce the time spent on physical inventory audits.

2. Checks are deposited properly each day.

A basic principle of cash management is to keep it moving. The faster cash moves from the customer to the bank and into appropriate short-term investments, the better. Another benefit of daily check deposits is that they decrease the possibility of loss, which creates numerous other problems.

3. Customer invoicing is done promptly (within two working days).

Waiting to bill customers is a poor practice. It communicates to customers that it is okay to be late with their payments. Incorrect invoicing also creates delays and takes valuable time to correct.

4. Collections are received within 60 days.

When it takes longer than 60 days to collect payments, the business needs to examine its credit and collection policies. Long collection periods increase operating expenditures through additional billing costs, lost interest and the need to borrow to meet current operations.

5. Accounts payable take advantage of cash discounts.

Taking advantage of cash discounts that suppliers offer saves money and is an important step for the business in its attempts to establish itself as a primary customer. Being considered such a customer can facilitate delivery, improve services and can be an excellent source of new business leads.

6. Disbursements are made by prenumbered check.

Prenumbered checks are primary source documents for accurately determining expenses. Not using them increases the time spent on bookkeeping, makes it difficult to monitor expenses accurately, increases the probability of double payments and communicates to suppliers that the business is a marginal operation.

B. The company projects cash flow needs.

Most small businesses use a cash basis rather than an accrual basis of accounting. Though a cash basis is easier and takes less time to maintain, it often gets the business into trouble, because the business has incurred expenses for which there is no proper accounting. By keeping track of accounts receivable and accounts payable, it is relatively easy to project cash flow needs.

1. Payrolls are met without problems.

When a business has a problem meeting its payroll, drastic action is generally needed to save it from financial ruin. Generally, the owner/manager has not been watching the books closely enough. When this happens, it is a sure sign that general business practices are poor. On the other hand, an ability to meet the payroll is usually a sign that the business is at least in a fair state.

2. Money is set aside for expansion, emergencies and opportune purchases.

Few small businesses have the advantage of being cash rich. Many fail simply because they do not have money set aside for emergencies, they operate too close to the margin. Having an emergency fund should be considered a necessity rather than a luxury. Having an expansion fund, or a special fund set aside to take advantage of opportunities, not only reduces stress for the owner, but can often provide an operational advantage for the business.

3. Short-term financing is used when needed.

A small business should borrow money only when needed or when analysis proves it will be profitable to do so. Short-term financing is essential to a seasonal business. But poor analysis turns short-term loans into long-term debt, putting the business in a precarious financial position. Incorrect use of short-term financing was a major problem for a number of the cases studied.

4. A line of credit is established with a bank.

Having a predetermined line of credit means the business is a good credit risk. It is a sign that the business is well managed. A preestablished credit line provides operational flexibility and, when used properly, can provide a source of funds to meet emergencies or to take advantage of investment opportunities. Another advantage of developing a line of credit is that it establishes a relationship between the business and the bank, facilitating later acquisition of long-term financing for expansion, etc.

C. The company understands the role of financial planning in today's highly competitive lending markets.

In order to obtain credit in today's tight money markets, financial planning is essential. Lenders want to know as much about the person to whom they are lending as they do about the business. This means that a well-prepared business plan as well as a detailed personal statement will be required.

1. The owner's personal resume is prepared and current.

A well-written and professionally prepared resume is an indispensable document for obtaining small business loans in today's market. Obtaining a small business loan takes personal salesmanship, and the owner must demonstrate competence to run the business. A well-prepared resume informs the loan officials that the owner is qualified to manage the business and repay the loan on schedule.

2. Personal financial statements have been prepared.

Even when the business is incorporated, most lending institutions assume they are lending money to the owner personally. Having a well prepared personal financial statement can increase the probability of obtaining a loan.

3. There is a written business plan.

A written business plan is a road map that tells a loan officer what the business is, where it is going and how it is going to get there. Without a well-developed business plan, it is unlikely that a loan will be obtained.

4. There is a source and use of funds statement for the past two years, with a projection for the next two years.

The source and use of funds statement, more than any other document, lets the loan officer know if the business is viable. It is also essential for the management of cash flow and is an essential operating document, even when a loan is not being requested.

5. There is an accurate balance sheet for the past two years, with a projection for the next two years.

Historically, the balance sheet has been the primary financial document used by loan officers and others in the financial community to determine the financial health of a business. It is still necessary to include balance sheets in the loan proposal package, though, by themselves, they are no longer sufficient documentation for obtaining loans.

6. The owner has a good working relationship with the banker.

The small businessperson must have a good professional relationship with the banker and must keep the banker informed about the business on a quarterly basis. A well-informed banker can provide valuable financial information and will be more likely to lend money when it is requested.

7. There is a strong debt-to-equity ratio (1:2/1:1).

It should be obvious that a banker only wants to lend money to a successful business. The banker also wants to know that the owner has at least as much at stake as the bank, and preferably twice as much.

To Management Audit: Financial Planning and Loan Proposals Audit - Top