For any business, a long-term growth strategy is essential for success. Part of that growth strategy should include obtaining the credit your business needs or will need to expand facilities, increase inventory, attract potential investors, or improve cash flow.

“It’s a good idea to establish a solid working relationship with a trusted banker early,” said Maria Hunter, First Bank’s Relationship Manager, “even if you don’t have a great borrowing need now.” This allows you to establish a rapport with the bank, allowing the banker to gain a general knowledge of your business’ short and long-term needs and goals. “Even before ever applying for a business loan," added Hunter, "you’ll already have a proven track record with the bank.”

Hunter recommends coming prepared to a financial meeting with the documents you’ll need, including the correct reporting information. “First Bank’s relationship managers are always here to discuss your financial needs as well as what you may need to prepare ahead of time,” she said.

Find out more about what to bring to your lending meeting and credit by reading “Navigating a Business Loan: Know the Five C’s of Credit,” which is available at firstbanks.com.

COMPILATION VS. REVIEW VS. AUDIT

“Essentially, there are three basic levels of financial reporting,” said an industry expert. “The standard levels of reporting include a compilation report, a review, and a full financial audit.”

The compilation report is simply a set of financial statements. “With a compilation report, there’s no assurance from a certified professional accountant (CPA) that the information is correct,” he said. “The CPA or accounting firm is simply compiling the information that was provided to them with no verification of its accuracy. Having compiled financial statements shows lenders you have an association with a CPA, but doesn’t offer any assurance on the accuracy of the financial statements.”

According to the expert interviewed, "The financial review is just that—a review of the financial statements. The review service is one in which the CPA performs analytical procedures, inquiries, and other procedures to obtain “limited assurance” on the financial statements and is intended to provide a user with a low level of comfort on their accuracy. A review is substantially narrower in scope than an audit. A review does not contemplate obtaining an understanding of your business’s internal control; assessing fraud risk; testing accounting records through inspection, observation, outside confirmation, or the examination of source documents or other procedures ordinarily performed in an audit.”

WHAT IS A FINANCIAL AUDIT AND WHY ARE THEY CONDUCTED?

A financial audit is a thorough review of all financial statements of a company in accordance with Generally Accepted Accounting Principles, or GAPP.

According to the expert, “The audit is the highest level of assurance service that a CPA performs and is intended to provide a user comfort on the accuracy of the financial statements. The CPA performs procedures in order to obtain “reasonable assurance” (defined as a high but not absolute level of assurance) about whether the financial statements are free from material misstatement. As the highest level of assurance, an audit typically is appropriate and often required when you’re seeking complex or high levels of financing and credit. An audit also is appropriate if you’re seeking outside investors or preparing to sell or merge with another business.”

When companies are at a stage where they wish to grow their business through seeking upside investing or lending, it’s important to provide audited financial reports. It’s generally impossible to find potential investors or buyers without that higher level of reporting (audited statements).

Investors or lenders are looking at the “big picture” from a credit perspective and they’re also looking at the risk profile. Essentially, with any prudent lender or investor they’re going to want to mitigate their exposure or risk with detailed, financial information such as is found in a financial audit. Of course, there’s a lot of research that goes into the matrix of a credit decision, including the existing relationship you already have established with the bank. At the client discovery meeting, businesses that are seeking credit are always asked what type of financial reporting they use.

A deterrent for small to mid-sized businesses could be the costs associated with a full financial audit. A financial statement audit is more comprehensive than a financial statement review so, of course, the cost will be higher. “However,” as the expert explained, “there are instances where a review is sufficient versus a full financial audit.”

If your business or family-owned business is poised for growth, contact a knowledgeable First Bank relationship manager to determine the level of reporting requirements needed for your next project.

Brett Tijanich is Senior Vice President and Team Leader, Commercial Banking for First Bank. He can be reached at (562) 951-5104 or Brett.Tijanich@fbol.com.

Return to Index

For reprint and licensing requests for this article, CLICK HERE.