Working Capital Management and Bank Loans

A profitable business can still run out of cash. Sales are booked before customers pay, inventory is bought before it sells, and payroll is due on a fixed date. Working capital management is the discipline of seeing those gaps coming and closing them. When the gap needs outside money, the quality of your financial records often decides how smoothly a lender can say yes. We help owners in Naperville, Aurora and Chicagoland, and in every state, do both. We do not make loans, and we cannot guarantee approval, rates or terms. Lenders make those decisions.

Managing working capital

The 13-week cash-flow forecast

A 13-week forecast lists, week by week, the cash you expect to receive and the cash you must pay over the next quarter. It starts with the bank balance and adds expected collections from the customer aging report. Then it subtracts payroll and payroll taxes, vendor bills, rent, loan payments, sales tax and owner distributions, and shows the balance at the end of each week. Each week the forecast is updated and compared with what actually happened, so it improves over time.

Example, with simple numbers. A distributor starts a quarter with $80,000 in the bank. The forecast shows that large vendor payments and payroll in week 6 would take the balance to negative $20,000, while a $60,000 customer payment is not expected until week 8. With six weeks of notice, the owner can ask the customer for earlier payment, negotiate vendor terms or arrange a line of credit, instead of discovering the gap that week.

Receivables, payables and inventory

• Receivables. Clear terms, prompt invoices, an aging report reviewed weekly, and follow-up before invoices are overdue. A common measure is how many days customers take to pay.
• Payables. Pay on the due date, not early and not late, and plan the biggest bills around known cash inflows.
• Inventory. Cash sitting on shelves earns nothing. We look at turnover and slow-moving items, and at whether purchasing matches sales.
• Payroll taxes. Taxes withheld from employees' pay are held for the government. Using them to cover other bills is one of the most dangerous ways to manage cash; see the trust fund recovery penalty.

Financing choices, in plain terms

The SBA describes 7(a) as its primary program. Standard 7(a) loans run from $350,001 to $5 million with a 75% guarantee, and smaller 7(a) loans go up to $350,000. A 504 loan funds fixed assets and cannot be used for working capital, inventory or rental real estate investment. In general the business must be an operating, for-profit U.S. company that meets SBA size standards and can show it can repay, but eligibility varies by program and lender. Which program fits, and whether you qualify, is for the lender and the SBA to decide. Programs change, so check sba.gov and ask the lender for current terms.

The lender-ready package

Lenders want to see that the numbers are consistent and that you understand them. A typical package includes:

• Financial statements. For an established business, the SBA's guidance is income statements, balance sheets and cash flow statements for the last three to five years, plus year-to-date statements.
• Business tax returns, and the owners' personal returns, usually for the last few years.
• Projections. Forecasts that match the amount you are asking for and explain how the loan will be repaid.
• A debt schedule. Every loan and line: lender, balance, rate, payment and maturity.
• Receivables and payables agings, and inventory detail if relevant.
• Personal financial statements for the owners.
• The request. The amount, the use of funds and the collateral offered. For new businesses, the owner's personal credit is typically a major factor.

We prepare or review these items, make sure they agree with each other and with the tax returns, and write the explanations lenders ask about, such as one-time expenses or a drop in margin. See accounting and financial statements.

How an engagement works

1. Consultation on how much cash you need, what for, when, and what you have already discussed with lenders.
2. Written engagement agreement with the scope, deliverables, what you provide and how fees are determined, signed before any work begins.
3. Document collection: books, bank and loan statements, tax returns, agings, leases, contracts and owner financial information.
4. Preparation of the forecast, updated statements, projections and the package.
5. Review and delivery, including the questions a lender is likely to ask.
6. Follow-up. After you apply, we answer lender questions and update numbers on request. If you are declined, we help you see what to improve.

Common problems we fix

• Books that do not agree with the tax return, which undermines everything else in the package.
• No forecast, so the cash shortfall appears before anyone plans for it.
• Debts omitted from the schedule, which a lender will find in a credit check.
• Owner pay and personal expenses mixed into the business, hiding true earnings.
• Applications made when the books are three months behind.

How we can help

We act as your finance team on the preparation side, working with bookkeeping, virtual CFO and advisory and your tax return. Meetings take place in person in Naperville and Aurora or by video. We can talk with your lender at your request, but we do not negotiate on the lender's behalf and cannot promise any result. Contact us to get started.

Frequently asked questions

General information only, not tax, legal or accounting advice for your situation. Rules, limits and deadlines change; confirm the current rules with the official source or a qualified professional before you act. Reading this page does not create a professional relationship with CPA Tax Payroll and Accounting Corp.