A businessperson needs to make his business a separate entity in the eyes of law; he can do so by incorporating his business. This means he differentiates between his personal assets and those of his company, it also means that he is not liable to use personal funds to meet the needs of his business.
A smart, well-written and detailed business plan builds credibility for the business. The plan contains financial details, along with other parameters that define the scope of business. The businessperson needs to know exactly what is written in the plan so that he can answer questions confidently if he is ever challenged in the court of law or by the press. He must get clearance from state authorities and must acquire all necessary permits and licenses to run his business. He needs to become familiar with the federal, state and local law requirements before starting his business in a particular region.
A good businessperson understands what lenders and credit bureaus look for whilst considering loan applications. He should know the criterion for loan approvals so that he can build a solid business profile with strong credibility.
Building a credible business profile is similar to building a credible personal profile. The following list of to-dos makes companies financially dependable:
• A business should clear all payable invoices before the due date. Business Associates like lenders, vendors, suppliers, and employees would give favorable comments if they receive payments on time.
• A business must maintain confidentiality, it is not right to pass on company's information pertaining to financials to everyone.
• A business should not have more than two credit cards in the name of the company; association with twenty credit card companies does not give the right impression.
• A vigilant businessperson should get the permits and licenses renewed well in time and he should never allow them to lapse.
• A shrewd businessperson is meticulous about bookkeeping, he maintains financial records in detail so that lending companies find it easy to assess the company's financials as and when needs be.
Business credibility management means more than an excellent business plan, to create the right impression a businessperson needs to show proof of being financial sound and independent. Lending institutes are particular about the financial stability and reputation of the loan applicants. A business leader should work on the following features to build his company's image.
Capacity -- Company's ability to repay loans on time reflects its financial capacity. The loan application evaluators refer to the debt ratio and the liquidity ratio to assess its financial stability. Financiers get in touch with credit reporting agencies to find out the company's history related to debt payments. It is in the best of interest of the business to maintain a strong record by paying back loan installments on time.
Company Character / Reputation -- Lending institutions make sure that they extend loans to reliable and trustworthy companies. Banks and financial houses tend to evaluate the future business potential and its standing in the particular industry. A good feedback from credit reporting agencies and strong financial reports are two strengths that reflect a good reputation and a sound standing.
Business Capital -- Businesses require funding, the source of funds vary some businesses have an excellent sales turnover and reap enormous profits; they maintain a reasonable operational cost and enjoy sufficient earnings. Some companies offer shares and bonds to investors and generate funds to operate; and some approach lending companies to start a new business or expand the current scope of business.
The above passage highlights a few ways of building business credibility; a good businessperson would maintain his credibility score by intelligently applying for loans and by making payments on time.
Balance Sheet Basics
People who want to invest always seem to have more interest on how much they will make than on how they will make it. This is different for business owners because most of your attention has to be directed to the balance sheets. They will let you know how your business is performing and you will further know the components of your business in general. This is the main reason having some basic knowledge on balancing the sheets will come in handy.
Liquidity and solvency
A lot of the well known established financial experts have a belief that liquidity and solvency are considered as the most significant parts of balancing a sheet. This is because this is the main way through which you can know if your company is in the right path or not.
Solvency can be described as the rating of how well your company can handle itself over a long period of time. Liquidity, on the other hand, is how well your business can manage within a short time e.g. the amount that is needed to work daily and take care of the bills incurred.
Concentrating on the assets of a company compared to its liabilities is vital when one is determining the company's' liquidity. Liabilities can be referred to as what the company can be able to pay for over a long period. Money at hand, things that can be changed into cash and inventories are all included in the assets. Most financial institutions like to see a case where the company's' liabilities don't exceed its assets. This is what shows if your company is doing well or not.
Solvency, on the other hand, shows the amount your company owes as compared to its assets. Most financial experts would rather it balances of in term of the ratio as you would not like your company to be in so much debt than you can afford to pay. Balancing the ratio is the ultimate issue when it comes to solvency.
Physical and non-physical assets.
It is important to know what assets you can dispose off in case you are I dire need of quick financing. These can either be the physical ones or the intangible ones. A good example of an intangible asset is a patent while the physical ones include the buildings, machines, inventories, cash at hand and others.
In the balance sheets, company's tend to input the tangible assets. This is the main reason why a lot of care is taken when reviewing assets that aren't physical. A good example is when you buy something for more than it is worth. What will be indicated in the balance sheet will be what you spent buying it and not what it is worth.
Study the Balance Sheet
All the sections in a balance sheet have to be broken down into percentages. This will make you to better understand your company's balance sheet. The main difference between looking at an income statement and balance sheets is that in the case of a balance sheet, it can be done in two different ways.
In the first way, you can decide to express all the companies assets as a percentage as compared to all its' equity, assets and liabilities. In order to get the best gauging of the company's' performance, you will need records dated back at least three years. This will enable you to correct any dramatic changes in any spots.
The next method is to calculate each item in comparison to the statement of income. This will make you to see how each of the items changes when compared to the company's' revenues and assets. Any change that doesn't make any sense needs to be looked into very carefully.
In general, there are several aspects of balance sheets that will need to be looked at keenly. However, the few that are mentioned above tend to be the most important ones that anyone can look at to know how the company is doing. This will make you to know whether your company is gaining any ground or if it is heading downhill. These is why reviewing your balance sheets monthly will keep your company on track by correcting any mistakes that may come up and affect the smooth running of the company.