Many small business owners think of financial statements as something that’s only needed at tax time or when the bank asks for them. But the truth is, your financial statements are some of the most powerful tools you have for understanding and running your business. They don’t just show where you’ve been, they guide you to where you’re going. And they're a great tool to show you know what you're doing, and that you can afford that loan from the bank you're chasing. 

Sheila Sue decides to expand – and needs new premises to do so.

In business, you want to maximise your strengths and make sure your weaknesses are covered and compliant. Most people know when the business is going well, as they find themselves super busy, demand is very high, and they're struggling to fulfil orders because items sell out so fast, or they can't find any booking slots for the next customer.

Sheila Sue has been working in her home town (Karratha of course) in a small granny flat behind her home. Her hubby is a bit over the constant traffic, she's always fully booked out, and she is struggling to find time to answer the calls between her clients. As a colouring specialist she really needs to pay attention! 

All of the Salon business plus two kids in primary school means Sheila is super busy, and either she starts turning people away, or she looks for ways to meet her people's needs. She spoke with her accountants at Northwest Accountancy and they helped look for ways to feel less stressed and busy. 

Raising her prices helped with cashflow, but didn't help with demand. Even with an increase, her people still loved coming in for a "Colour, Cut and Cuppa" so while it helped in some areas, it didn't help in others. 

Sheila Sue had always had a dream of running her own small salon, and she had always been scared to make the leap. She couldn't buy a salon, and she didn't have the money to rent a full sized space, but she found a perfect little salon for just two stylists, already kitted out, and almost within budget. She was going to have to ask for help from the bank.

This is where financial statements become really handy. Financial statements tell the story of your business in numbers. Sitting down and studying the graphs, charts and details of her sales and debts and cashflow she starts to realise she could probably afford the new place for her business. 

And if she had a little more room, she could hire the apprentice she wanted to answer phones and sweep hair and make the tea! She bundled her documents together, and made sure she understood the strengths and weaknesses of all the reports Xero made for her. 

With these reports, she considered questions with confidence:

• Can I afford to take on that apprentice, Janice? 
• Should I upgrade the salon now, or wait?
• How will this affect tax, superannuation, and other payments?

Without accurate financial statements, you’re guessing, and guessing with money is risky.

What Sheila Sue did to prepare for asking for a loan 

Knowing that her super popular "Colour, Cut and Cuppa" deals were only as good as the quality of her dye, tea and cutting skills, she also knows that her financial info is only as good as the data she puts into it. 

• She checked her books are fully up to date and nothing is missing. She prefers to enter income and expenses every Wednesday and Friday after work, rather than leaving it until the end of the quarter.
• Reconcile bank accounts: Make sure your transactions match your bank statements so the reports reflect reality.
• Check that items are sorted and categorised correctly: Move anything sitting in suspense accounts into the right place.
• Organise receipts and documents: Keep digital copies so nothing gets lost.

She ran the reports one last time to make sure they were neat, as the last ones were covered with notes and scribbles of future expected super, apprentice wages, and rent increases. She also created a spreadsheet to show her current financial state and the expected changes. 

Your bank will want to know everything

Xero's reports won't be the only thing your bank asks for. They might also ask for the following: 

• Profit and Loss Statement to see if the business is making a profit.
• Balance Sheet to outline your assets, liabilities, and equity.
• Cashflow Statement or Projections – proves whether you can meet loan repayments.
• Tax Returns (business and personal) to verify your income and compliance history.
• BAS Statements to confirm your GST and PAYG reporting is up to date.
• Bank Statements to give a picture of your cash position and transaction history.

The TV trope of walking into the first appointment and walking out with an approved loan is a fantasy, so be prepared for a list of further documents and questions that you will need to answer! Plus there will be forms you will need to complete and legally binding agreements about assets and debt collection if things go wrong. Be sure to read everything carefully and get expert help if you're unsure of something!

The banks did not give Sheila Sue her loan

But because her mind had been opened to other possibilities, she knew that she could afford an apprentice even without moving. And her calculations in the spreadsheet showed that it would not take long before the apprentice would be able to take more work from her, freeing her up to do more of the hair colour and cuts that really made the money.

Disappointment did stop Sheila from making changes immediately, but when she was ready she used feedback from the bank manager to reassess her documentation, presentation and finances. Next time she was going to apply, she would be much better prepared, and would have further increased income due to Janice.

Her experience helped make her future decision-making process become faster and less stressful. She knows what questions the bank will ask, she knows what documents she needs, and she knows to get her accountant onboard as early as possible if considering future growth. Plus she also understands her business on a new level, and can see why the bank rejected her application today, and what other financial institutions might look for in creditors.  

Accurate financial statements don’t just help you survive tax time, they help you build a stronger, more sustainable business.

If you'd like to avoid Sheila's fate, talk to us first! Northwest Accountancy has a team of experts that help with businesses finances and support, and we'd love to have you on board! Book in a chat here: 
https://www.northwestaccountancy.com.au/contact