26 Oct Read Your Financial Statements Like a Lender or Buyer
Whether you are seeking financing, planning an ownership transition, or working to improve profitability, your financial statements should tell a clear story. Lenders and buyers look beyond revenue to assess cash flow, risk, and long-term value.
What they look for
- Revenue quality. Recurring, diversified revenue is more valuable than revenue concentrated in one customer, product, or season.
- Gross margin. Declining margins may signal rising costs, underpricing, inefficient labor, or poor job costing.
- Operating expenses. Clear categorization helps distinguish normal operating costs from owner benefits and one-time items.
- Cash flow. Profitable businesses can still struggle if customers pay slowly or debt payments are high.
- Working capital. Receivables, payables, inventory, and short-term debt affect your ability to cover payroll, vendors, and taxes.
- Bookkeeping quality. Reconciled, well-supported financials build credibility with lenders, buyers, and advisors.
- Owner compensation. Salary, distributions, benefits, and business-paid personal expenses should be documented and understood.
Important numbers to know
Lenders often evaluate the debt-service coverage ratio:
DSCR=Net Operating Income / Total Annual Debt Service
This measures whether operating cash flow comfortably covers loan payments. Many lenders look for a ratio of at least 1.25, although requirements vary by lender and loan program.
Review these numbers monthly
| Metric | What it tells you |
|---|---|
| Revenue and gross margin | Whether sales and pricing are healthy |
| Operating cash flow | Whether the business generates usable cash |
| Receivables aging | Whether customers pay on time |
| Debt-service coverage ratio | Whether cash flow supports debt |
| Owner compensation | Whether owner payments are sustainable |
How we can help
Gates Kirby can help you prepare lender-ready financial statements, evaluate cash flow, identify adjustments, and position your business for financing, succession, or sale. If you expect to seek financing or transition ownership in the next 12 to 24 months, start preparing your financials now.
If any topics covered in this newsletter raise questions or if there are other accounting or tax matters on your mind, Gates Kirby & Company is always happy to provide guidance tailored to your unique situation. Our team genuinely enjoys helping clients navigate these topics with confidence. We look forward to connecting with you soon.
- Gates, Kirby & Company.
Tax laws, regulations, and interpretations change frequently. Due to nature and complexity of changing tax laws, the content may become outdated and therefore be historical. The newsletters provide no guarantee the information is complete, accurate, or current. Readers should review applicable rules and laws by consulting official sources (e.g., IRS, Colorado Department of Revenue) and/or consult with Gates, Kirby & Company to review how the newsletter content may be applicable to your tax situation.