The Lenders Are Back
Well, here we are again near another April 15th tax return deadline, working through completion of financial statements and tax returns to meet the tax and loan covenant deadlines for our clients. Tax season never seems to get easier, as the IRS and the states are always doing their best to introduce new tax regulations and changes for us to keep up with. Tax season is similar to hosting a large multi-day sale at your dealership, but the “multi-day” time frame for us means three-and-a-half months.
One thing I have noticed this tax season is the feedback we are getting from the lenders in our marketplace. They are looking for business! They seem willing to listen and help work through various situations our clients find themselves in. We are working with many of them on negotiating loan covenant changes that make sense both for the lender and the client. Some covenants were set during earlier times and aren’t appropriate for the dealers’ current or projected future plans.
Most lenders have similar covenants and guidelines in their loan agreements. It is best if you do read these agreements very closely and also have your accountant and attorney review them for comments and suggestions. You and/or your accountant should work through any loan covenant calculations very carefully and ask your lender, or prospective lender, for the calculations they have completed on your financial statements from their review.
Many times your lender is not aware of how you are completing various transactions on your financial statements and has to ask quite a few questions regarding these. Some of these questions relate to year-end adjustments on your twelfth or thirteenth month financial statements and sometimes your interim monthly statements. Many times when you get these questions you forward them to us to explain and detail for the lender so they can understand the adjustments made.
Your lenders normally require you to complete monthly compliance certificates and other calculations which show you are meeting the loan covenants that month, quarter or year-to-date period. This is a good practice as it makes you review your financial information monthly to make sure you are meeting the loan covenants and recognize trends very quickly, whether good or bad. With this information you can anticipate loan agreement modifications or terms you need to work toward with your lender or prospective lender.
Whether you currently have financing or are anticipating contacting lenders for a new or increased line of credit, mortgage, floorplan, etc., you need to make sure your financial statements and business model are up to speed. Most lenders want your monthly financial statements to look as close to our year-end CPA-issued Generally Accepted Accounting Principles (GAAP)-based statements as possible. This makes it easy for the lenders to review them for consistency of presentation and normally generates fewer questions overall.
With this in mind, you should compare your monthly internally-generated financial statements to your year-end CPA-issued financial statement and work through the differences with your CPA and lender. Normally it is fairly simple to make the changes to your statements to match ours. We have many professional guidelines and standards to adhere to when we prepare your financial statements. These financial statements reflect your net worth and future borrowing power to your lender.
Some of the most common changes we encounter are accounts shown in the wrong area of the balance sheet or income statement. Most accounting systems have a setup to determine the type of account it is and also a numbering system to conform to. Knowing your business and the correct placement of the account can affect your covenants and other compliance calculations your lender may have imposed on you in your loan agreement.
Whether you are a new-car dealer, used car dealer, or a BHPH or LHPH dealer, the look of your financial statements can vary quite a bit. It is very important you are consistently presenting your financial statements in the correct format. One way to check this is to print side-by-side monthly or year-to-date financial statement formats, if your system will allow it. If not, you can normally export the information to a spreadsheet and review it. When you are comparing multiple-period financial statements, posting errors and large differences show up very quickly. It is better you find these first and correct them, or know why the balances are what they are, before issuing the statement to your lender.
Most lenders are also interested in reviewing your tax returns. Comparing your internally-generated year-end financial statements, the tax return and your CPA-issued financial statements can be trying sometimes. We start our year-end process with your internally-generated trial balance or general ledger, and make book adjustments and also book-to-tax adjustments to arrive at your tax return balances. Then we may have to, and normally do, make other financial statement adjustments to reclassify various balances to be in accordance with GAAP.
It is no wonder the lenders have questions, as there are many ways to present your financial information based on the end user. With some new anticipated accounting standards coming into play in the next few years, there will be more changes in the presentation of the financial statements and more time needed to understand the differences between the book and tax methods. There is always something new to look forward to in this ever-changing world.
What to do? Sit down with your accountant after April 15th and review what changes you should make to your financial statement presentation and accounting transactions. Arriving at more consistent-looking financial statements monthly as compared to your year-end financial statements will make your life easier and hopefully generate fewer questions from your lender.
Oh, by the way, most lenders hate large year-end adjustments which dramatically change your net income and/or balance sheet net worth and other calculations. If you have ever had to try to explain these adjustments to your lender, you will learn to handle these in advance with them so it is not a surprise. Most of these adjustments are tax-related to reduce taxable income at year-end. If you know you are going to do these adjustments, at least inform your lender of the intent so you don’t get a surprise phone call from them telling you that you no longer meet your loan covenants.
Good luck, and I will see you after tax season at the many conventions I will be attending and speaking at the rest of the year. And a large thank you to our many clients for their patience and endless questions they have to endure from us during tax season. It will all be over soon.
Vol. 9, Issue 5