Banking & Finance
Cooked books
Improve your chances of getting a loan by keeping two sets of books.
By Todd Shryock
Smart Business Cleveland | October 2000
You need a loan. A capital infusion will allow you to purchase that one piece of equipment that will put you one step ahead of your competitors.
So you pack up your financial records and head to your friendly local banker. He looks through your numbers, raises an eyebrow on several occasions, then looks at you and frowns.
Sorry, no loan.
What? Business is going well and increasing, cash flow is good and banks are supposedly begging people to borrow -- so what happened?
You took the wrong set of books. You took the books you use for tax purposes to apply for the loan. The problem is, your tax methods are meant to show as little profit -- if any -- as possible to keep Uncle Sam out of your coffers. When a banker looks at these records, he or she sees a business that isn't making any money. A loan to a business that has no income doesn't make much sense.
"You can have it both ways," says Alice Magos, a business analyst for CCH Inc., a business accounting and consulting firm. "You basically keep two sets of books. You keep one set of accounting records for the purposes of maximizing your profits. These can be used to impress lenders, shareholders, your mother-in-law or just to reassure yourself that business is good. You keep these financial records to maximize profits and don't fool around with them come tax time."
When tax time arrives, you either recast the numbers or keep a separate set of financials to calculate your tax bite. There are different ways to handle things such as depreciation. One might be better for tax purposes, while another will show a higher profit to potential investors. If you're using accounting software, there are often built-in options to handle many of these tasks.
"There is no rule that you can't keep two sets of books," says Magos.
There is nothing illegal about the practice, and accountants use it all the time. Don't think the bank will draw its final decision based on your rosy numbers though, because it will want to see your tax returns as well to get the whole picture.
But by keeping two sets of books, you've done a lot of the work for the banker by showing your business really is profitable, despite the tax calculations, which can be key to getting a loan. Todd Shryock (tshryock@sbnnet.com) is SBN's special reports editor.
