Armanino Blog

Working capital loans: why a good accounting system matters

by Steve Chapman
April 29, 2014

If you're considering asking your bank for a sizeable working capital loan, you should make sure you have the right accounting system in place beforehand, so you can avoid audit pain later.

After you get a loan, you're going to have to provide good and accurate financial statements for several years, which means the bank will audit your records during the life of the loan and may require an independent audit by a CPA firm.

Let's go over what to expect if you have a $10 million working capital loan:

  • Typically this is an asset-based loan, backed up by your accounts receivable. On a regular basis, maybe quarterly, your bank will send over an auditor or two to test your system and verify that the accounts receivable reports you've been sending to the bank each month are accurate.
  • If the auditor(s) can easily track specific invoices from your accounts receivable aging back to the actual invoice and shipping documents, the audit will be quick and relatively painless. If not, your loan officer will be calling you shortly, and things will devolve from there.

There also may be loan covenants or other aspects of your business that cause your bank to ask for an independent financial audit. If this happens, here are a few things to expect:

  • CPA auditors will be at your business for days or weeks, and they will look at seemingly everything. Their main goal is to assure the audit partner that your financial statements are accurate, so that the partner can sign their name on an audit report that attests to that fact.
  • They will test balance sheet amounts by tracing specific transactions back to source documents.
  • If you have a lot of inventory, they will test that or observe your inventory count.
  • They will test for timing to make sure that all sales and expenses were recorded in the proper fiscal periods, and that they were recorded for the proper amounts. They are auditing your financial statements and the system that produced them. The auditors will be spending almost all of their time analyzing and testing the information in your accounting system.

All of this is significantly easier to endure if you have a good accounting system and are using it properly to record transactions. Below are aspects of an accounting system that will help you control your business and provide accurate financial statements during this process:

  • All transactions are posted on a timely basis.
  • There is a solid audit trail that tracks and references all transactions.
  • User access can be limited to only the specific functions any user needs to complete their job duties.
  • Detailed records for assets (accounts receivable, inventory, fixed assets, etc.) and liabilities (accounts payable, loans payable, deferred revenue, etc.) reconcile exactly to the general ledger.

If you are considering, or may consider, a working capital loan from the bank, there's no time like the present to evaluate your current system and get your ducks in a row. To learn more, give us a call or drop me an email. Armanino can provide accounting options and a deep bench of resources to ensure that your system works to its fullest potential.

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