5 Bookkeeping Mistakes Banks Flag Immediately

Business loan denied? Are you afraid this could happen to you? It is likely because your business’s financials have issues. DOn’t let this happen to you!

A few years ago, a client referred to me had been denied a loan by a bank. When I looked at their Profit and Loss Statement and Balance Sheet, I immediately knew why. Let me walk you through 5 common mistakes small businesses make in their financials.

Miscategorizing Cost of Goods Sold

A profit and loss statement always has revenue/sales at the very top. But, there are expenses that are incurred by the business to generate those profits, and that is your cost of goods sold. In this case, the company was in construction; therefore, to build a home, we all know there will be materials and labor costs at a minimum that generate revenue.

When I reviewed the profit and loss statement, I saw well over $3M in revenue but only $50K in cost of goods sold. That would be an immediate red flag to a loan officer. If you looked further into their statement, many of the accounts that should have been classified as cost of goods sold were classified as operating expenses. Operating expenses are those things you pay for in the general running of your business.

Solution? Re-classify these accounts that should be in cost of goods sold out of the operating expenses. The time it takes to do this is minimal, but it does require an understanding of your chart of accounts structure, so hire a bookkeeper to do it!

Personal Expenses

Also, the balance sheet showed that several personal credit cards were included. This is a definite no-no. How did I know? Well, on some accounts, it said “personal”, plus I asked, and many of them were personal even if not clearly identified as such. These accounts had to be removed from the books, and all transactions were marked as owner draws and expenses because the IRS does not allow these charges as deductions. And, the bottom line is this: any time you do this and do not account for it properly, anyone looking at your books will suspect them of having other errors. Now, what is the likelihood of being audited by the IRS? No one can predict that, but it’s better to be safe than sorry.

Solution? Be disciplined in how these accounts are handled with a clear standard operating procedure that is defined and audited. Business credit card(s) are the only way to claim business deductions. However, if a personal credit card is used for any reason, document it and have the bookkeeper post a journal entry with all documentation attached in your books.

Payables are Suspect

This requires asking a few questions to uncover issues, but suffice it to say, the Payable balance on the Balance Sheet must be accurate. It should show, at any time, what the business owes in short-term liabilities. This is true for long-term liabilities such as loans, but that is a story for another day.

When we began tracking invoice aging, several payables were already overdue. This is likely due to several cash-flow issues, which is why this client went to a bank in the first place. However, when we asked about the balances, we found that no one knew whether anything was missing or whether the data matched vendors’ records of what was owed. Bottom line, the business did not know if it was accurate – and that is a red flag.

Solution? Have a dedicated bookkeeping resource that will help ensure this balance is accurate. They can contact vendors asking about open balances and researching any discrepancies.

Accounts Receivable Issues

The source of being able to pay your short-term liabilities (Accounts Payable) is staying on top of what customers owe YOU. That cash flow is critical to your business’s short-term viability. Thus, we immediately saw a relatively large Accounts Receivable balance, and the aging indicated slow client payments. If that can be addressed, some of the cash flow strain would be mitigated, if not fully eliminated. 

Solution? Someone needs to be focused on that client relationship, ensuring that bills get paid – and that often is a bookkeeping resource. This is exactly how a bookkeeper can provide you with leverage!

Incomplete Books

One of the first things I ask about when reviewing financial statements is: Have the bank accounts, credit cards, long-term loans, and other assets been reconciled? If the answer is no, you will not be approved for a loan.

Why is that? Well, only when you reconcile these accounts do you know with absolute certainty that all transactions have been accounted for in the books. In fact, I had a client once who refused to let me have bank statements to reconcile the books, and in that case, I expressed to her that she would have to run her own financial statements and she would solely be responsible for anything missing since I was unempowered to ensure it on my end. In fact, we no longer work with clients like that because we cannot ensure the books are clean and complete.

Solution? As a business owner, maintain a standard operating procedure stating that you or your bookkeeper will always keep the books reconciled. Every. Single. Month. Period. That will ensure that any banker, when they review your financials, will see that you are on top of your financial health.

The Bottom Line

Here is why this matters. When this client went to the bank, they needed cash flow. But they walked away with nothing and had to spend the time unraveling the mess they had created in their books. When you are in need of short-term cash flow, you do not want to wait any longer than it takes to get approved for a loan. So keep your books clean!

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