Preparing financial statements for borrowing capital in New Zealand is a critical step in securing the funding you need. Lenders rely heavily on accurate and comprehensive financial documents to assess your creditworthiness and evaluate your ability to repay loans. Understanding what lenders look for and how to present these documents effectively can make a significant difference in your loan application success. In this guide, we’ll explore the essential financial statements required and practical tips to increase your chances of approval.
1. Income Statement (Profit and Loss Statement)
What to Include:
- Revenue (sales income)
- Cost of goods sold (COGS)
- Operating expenses
- Net profit or loss
What Lenders Look For:
- Revenue Trends: Are your sales or revenue increasing, stable, or declining?
- Profitability: Is your business generating sufficient profits to cover loan repayments?
- Expense Management: Are your expenses proportionate to your revenue?
Tips for Preparation:
- Ensure Accuracy: Double-check all revenue and expense entries to avoid errors.
- Highlight Trends: Use comparative figures (e.g., last year’s performance) to show growth.
- Separate Non-Recurring Items: Identify one-off expenses or revenues to give a clearer picture of ongoing operations.
2. Balance Sheet
What to Include:
- Assets (e.g., cash, accounts receivable, inventory, equipment)
- Liabilities (e.g., loans, accounts payable)
- Equity (owner’s investment and retained earnings)
What Lenders Look For:
- Assets vs. Liabilities: Is your business solvent? Do you have enough assets to cover liabilities?
- Liquidity: Do you have sufficient current assets (e.g., cash, accounts receivable) to meet short-term obligations?
- Leverage: How much debt do you already have compared to equity?
Tips for Preparation:
- Update Valuations: Ensure assets like inventory and receivables are valued correctly.
- Reduce Debt: Pay off small liabilities to improve your leverage ratio before applying.
- Highlight Key Assets: Emphasise liquid or high-value assets that strengthen your financial position.
3. Cash Flow Statement
What to Include:
- Operating cash flows (from core business activities)
- Investing cash flows (e.g., purchase of assets)
- Financing cash flows (e.g., loan repayments, equity injections)
What Lenders Look For:
- Cash Flow Stability: Do you have consistent inflows to cover outflows?
- Operating Cash Flow: Is your business generating positive cash flow from core operations?
- Loan Repayment Ability: Can you maintain a healthy cash flow after accounting for loan instalments?
Tips for Preparation:
- Categorise Properly: Separate operating, investing, and financing cash flows.
- Forecast Cash Flow: Include a projection to demonstrate how the loan will improve your financial position.
- Address Deficits: If past cash flow is negative, explain how the loan will address these issues.
4. Accounts Receivable and Payable Reports
What to Include:
- Accounts receivable report: Outstanding customer invoices and due dates
- Accounts payable report: Bills owed to suppliers and payment schedules
What Lenders Look For:
- Receivables Turnover: How quickly are customers paying you?
- Payables Management: Are you keeping up with your supplier obligations?
- Ageing Reports: Are there overdue receivables or payables that could affect liquidity?
Tips for Preparation:
- Clean Up Overdues: Follow up on overdue invoices before submitting the report.
- Show Stability: Highlight consistent payment patterns to suppliers and from customers.
- Reconcile Reports: Ensure reports align with your balance sheet figures.
5. Tax Returns
What to Include:
- Past 2-3 years of business tax returns
- GST filings (if applicable)
What Lenders Look For:
- Consistency with Financials: Do tax returns match your submitted financial statements?
- Profitability Evidence: Is your business profitable according to your tax filings?
Tips for Preparation:
- File Timely: Make sure all returns are up to date.
- Review for Errors: Cross-check with your income statement for discrepancies.
- Highlight Tax Credits: Mention any tax credits or deductions applicable to your business.
6. Business Plan with Financial Projections
What to Include:
- Description of the business and target market
- Marketing and operational strategies
- Financial forecasts (e.g., projected income, cash flow, and balance sheets)
- Loan usage breakdown and expected ROI
What Lenders Look For:
- Future Profitability: Can your business grow and sustain profitability?
- Loan Usage Plan: How will the loan be utilised to enhance business performance?
- Realistic Projections: Are your financial forecasts achievable?
Tips for Preparation:
- Be Realistic: Use conservative assumptions for revenue and expense growth.
- Link to Loan Purpose: Clearly outline how the loan will improve cash flow, operations, or expansion.
- Show ROI: Demonstrate how the loan will generate a return on investment.
Additional Tips for Preparing Financial Statements Successfully :
- Organise Documents: Present your financials in a clear and professional format.
- Include Explanations: Add notes or comments explaining unusual items or trends.
- Engage an Accountant: Work with a professional to ensure accuracy and compliance with New Zealand financial reporting standards.
- Maintain Transparency: Be upfront about challenges and provide solutions in your application.
By providing clear, accurate, and well-prepared financial documents, you’ll enhance your credibility with lenders and improve your chances of securing funding.
The content in this blog is intended to provide general insights and should not be regarded as professional advice. Each business situation is unique, and we recommend consulting with a professional for specific guidance. At Black Arrow Business Studio, we specialise in accounting and consulting services designed to support your business’s growth and success. Feel free to contact us for expert advice and customised solutions.
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