Nonprofit Blog

A small business’s ability to track inventory and minimize errors, omissions and fraud depends on the existence of a robust inventory reporting and tracking system. Some small businesses continue to rely on a manual inventory system. Others have begun to computerize their inventory tracking process as the costs of doing so have decreased. While the underlying inventory process may vary, tracking inventory includes the following general elements:

Businesses with low credit scores are unlikely to obtain access to affordable financing. This may seem like a matter of common sense to bankers, but applicants with low credit scores are often surprised when they’re turned down — or offered less favorable terms than expected. Before prospective borrowers submit loan applications, remind them about the importance of establishing and maintaining the highest business credit score possible.

Would you like someone to tell you when there’s substantial doubt that a borrower will be able to continue normal operations over the next year? Fortunately, the going concern assumption underlies all financial reporting done under U.S. Generally Accepted Accounting Principles (GAAP). And, it’s something CPAs evaluate during financial statement audits. Here are a few items they look for during that assessment.

Bankers have a number of tools at their disposal to assess a prospective borrower’s loan application, but nothing can take the place of a face-to-face meeting. Of course, most borrowers respond honestly when they meet with bankers about their financial condition. But those with less than stellar financial records may be tempted to downplay their true economic situation. How can a banker determine if a loan applicant is telling the whole truth — or not? To help you vet loan applications, here are some interview tips that forensic accountants use to unearth exaggerations, misstatements and outright fraud when managers are suspected of dishonest behavior.

In a perfect world, companies earn revenue and generate profit consistently throughout the year. But some borrowers, such as landscapers, hotels and toy manufacturers, experience significant seasonal fluctuations in their financial performance, with most sales occurring in one quarter. Seasonal businesses still need working capital to operate throughout the year, for such items as inventory, rent and salaries — and they often need to turn to banks to fund the shortfall during the off season. Bankers can use these three approaches to assess and manage the credit risk associated with lending to seasonal businesses.   

Businesses may reissue their financial statements for several reasons. Management might have misinterpreted the accounting standards, requiring the company’s external accountant to adjust the numbers. Or they simply may have made mistakes and need to correct them. But a financial restatement also can be a sign of incompetence — or even fraud. Bankers should examine financial restatements closely to accurately evaluate their borrowers’ situations.

Gauging liquidity — how quickly assets can be converted into cash — helps bankers anticipate whether a borrower will be able to make timely loan payments. To measure liquidity, bankers traditionally look to the balance sheet and compute the current or quick ratio. But there’s also another, lesser-known metric called the cash conversion cycle (CCC).

A prospective borrower might seem solid until you perform an analysis of its strengths, weaknesses, opportunities and threats (SWOT). Suppose the SWOT assessment reveals that the company is vulnerable to competitors or potential threats, such as cyberattacks or financial fraud. Is it worth continuing to work with the borrower to fix these problems? Here’s some guidance to help you decide.

Many companies report financial metrics that don’t conform to U.S. Generally Accepted Accounting Principles (GAAP), such as earnings before interest, taxes, depreciation and amortization (EBITDA), in their business plans and other promotional materials. These figures can sometimes cast a more favorable light on the borrower’s historic and prospective operations than the GAAP figures do. So, do your homework before banking on non-GAAP metrics.

Thirty years ago, “lean” manufacturing was an innovative concept, imported from Japan. The theory was intuitive: Make products as efficiently as possible, using the least possible staff time, equipment and working capital. Borrowers who mastered lean fundamentals increased profits and used assets with greater efficiency. The secret to staying lean, however, is continuous improvement.