Financial Statements: Tips for Small Businesses - Culver CPA Group
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Financial Statements: Tips for Small Businesses

20 Jul Financial Statements: Tips for Small Businesses

Posted at 18:18h in Business by

To lend money, banks rely on three main business financial statements: the Balance Sheet, the Income Statement, and the Cash Flow Statement. They also review Business and Personal Bank Statements and Tax Returns.

Here is what banks look for in each document: 

 

  1. Balance Sheet

This is a snapshot of your business on a specific day. It shows what you own (Assets) and what you owe (Liabilities). 

  • What banks look for: Liquidity and Net Worth. 
  • The math: They look at your Current Ratio (Current Assets divided by Current Liabilities). A ratio above 1.0 means you can easily pay your short-term bills. 

 

  1. Income Statement

Also called a Profit and Loss (P&L) statement, this shows how much money you made and spent over a period of time (like a year). 

  • What banks look for: Profitability and stable revenue. 
  • The math: They check your Net Profit Margin (Net Income divided by Revenue) to see if you manage expenses well. 

 

  1. Cash Flow Statement

This document shows how cash moves into and out of your business. It ensures you have enough actual cash on hand to make your monthly loan payments. 

  • What banks look for: Positive cash flow from operations. They want to know you get paid by customers faster than you pay your own bills. 

 

  1. Bank Statements and Tax Returns

Banks use these to check the accuracy of your financial statements. 

  • What banks look for: Consistent daily balances and tax compliance. 
  • The math: They use your records to calculate your Debt Service Coverage Ratio (DSCR). The formula is: 

DSCR=Total Revenue minus Operating Expenses (before income taxes and interest) divided by Total Cash Needed to Pay your Debt (including principal, interest and leasing) 

Banks look for a DSCR of at least 1.25. This means you earn $1.25 for every $1.00 of debt you owe, proving you can comfortably afford the new loan. 

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