Banks and credit lines. How 'optimistic' should your balance sheet be?

[jonnyd]

Hello all,

Just interested to know how others treat this subject.

We have had a credit credit facility with a bank for about 6 years, which has proven crucial to our business countless times. The bank are quite flexible, and have always let us push things if we needed to. Overall very satisfactory.

The facility has a few requirements, amongst which are; a) a minimum shareholders equity level, and b) presentation of balance sheets every 90 days, at least one of which must be audited.

The question I have is this; when we prepare our balance sheet, is it 'fair game' or not to do some tweaking if we need to? I'm not talking Enron style fraud, but maybe a little optimism . . .

For example If during the quiet season I need to find a little more value to make sure we are complying with our minimum equity requirements, I might value our inventory a little higher than the 'firesale' value we'd normally use - not at stupid levels, but maybe a point of two over where we could guarantee to sell it right now.

There are variations on this theme, which we occasionally use when needed (which isn't always the case). They're not necessarily incorrect statements, just perhaps a little reckless.

Is this normal practice?

[tkessex]

I can almost guarantee that many a business has employed the 'tactic' you have described above, but it's not the sort of thing I would tend to endorse.

When I worked in a local public accountancy practice, one of the partners asked someone to 'engineer' figures for a business which had been trading for a couple of years, in order for the owner to obtain a (personal) mortgage. The guy was making £7,000 a year profit and it was suggested that my colleague 'massage' his predicted earnings for the coming financial year to indicate a profit in the region of £35,000-50,000.

It's a rather extreme example I know, but to put somebody in the position where they would clearly be unable to maintain credit repayments is, in my view, wholly unacceptable. I left my job soon after, just as the same partner introduced a 'pay 4x the going rate and have your accounts prepared before anyone else, even if you did bring your records in late and incomplete' option.

Presumably your bank manager knows what assets you hold, and will have some idea as to what they're worth. Are you not risking a lot, given how lenient they have apparently been in the past, should they find out that you're falsifying the figures...even if to a small degree?

[eequals]

Tkessex has a point that you should weigh up very carefully. You have clearly built up a relationship of trust from what you describe; something that is very difficult to achieve and very easy to lose.

In addition this is no way to solve a problem with your finances. You will be in danger of kidding yourself as well as the bank when your objective should be to improve your finances and strengthen your balance sheet with good trading and management of your resources.

Joe