- Hi, it's Connie here from Prosperity Finance,
sharing the best financial tips
so that you can be more successful
with achieving your financial goals.
I just don't know how time flies.
We're already towards end of March.
If you are self-employed,
you know the financial year 2021 it's almost finished.
Now if you plan to borrow money to do whatever,
this video is for you,
because I'm going to cover some very important information
and tips for you so that you can well prepared.
Firstly, let's clarify what is the self employed.
So, if you have a trading company
or you are a sole trader or in a partnership,
then you are self-employed.
In order for the bank to determine your income,
they will need some information to prove.
One of the most important documents
is the financial statements.
So that consists of profit, loss report and balance sheet.
Now, normally in the past before COVID,
the financial statement can be used for up to 18 months.
What that mean is, if you have financial year 2020,
you can basically use it until September 2021
because that financial statement
that's covers up to 31st Of March 2020
and you add 18 months, that's September 2021.
However, we had a COVID right now?
We all know most of the business were impact by COVID
different degree.
Now even though most of the business have recovered
from COVID, luckily, bank still want to know
the up to date information about your business.
So you can't wait to September
to get your financial 21 done.
Banks will require it as soon as April, May.
Now, even now I've seen one bank
already asked for year to date,
even though we're were almost finished 21 year
So what's the point of doing year to date?
Why not wait March to finish
and then we do a full 21 year.
But no, you can't just 2020 year financial,
you have to plan the year to date.
So it just shows
how tough it is these days for business owners
to prove their income.
There's a lot of paperwork involved.
So my recommendation is once we finish March,
after the Easter,
provide all the information to your accountant
and tell your accountant to appear your financial statement
as soon as possible, okay?
If you are looking to borrow money in the next few months.
I always get asked by business owner
that the question is how much I should pay myself
to help improve the borrowing capacity?
Now, it's actually not a simple answer
because what the bank looking at
the most important figure is the profit before tax.
And then they add back your salary or wages
and dividends, etc.
So it's really not just about your own income,
they will look at the business financials
and add back the profit.
So it's really about the overall picture.
If you reduce your payment to yourself,
then your profit supposed to increase, right?
Because the profits after your shareholder wages and salary.
So it's really about that big picture.
I hope that clarified that question.
Now in terms of how they assess the income,
as I mentioned, is the profit before tax.
before shareholders salary, wages, dividends,
but also there's a lot of other things go into it.
Now in reality,
what the bank really wants to know
is about the cash flow.
Because what can service the loan is the cash.
Profit sometimes doesn't equal to cash, right?
For example, if I have IT company,
I provide IT solution to clients, like companies,
my team deliver a service to my clients
and send that invoice to the clients
but they may not pay immediately.
The invoice says you can pay next month.
So that means yes, I recognize there's the sale here
but it's not a cash until next month, right?
So then we need to look at your account receivable
because let's say in that scenario, my clients never pay me,
then it's a bad debt, right?
So the sales is no cash.
So it's important that we need to look at
in conjunction with account receivable.
So, the bank will assess, you know,
how big is your account receivable,
how old is account receivable,
every industry has a different standard
sometimes over one month is it can be
it's alarming signal,
they may not pay you for whatever the reason.
For some industries to three months down the track,
they are all different.
So, we need to like look at our account receivable
and make sure you still believe
these money will be collected in the end
and convert it into cash.
And the second factor is any existing debt or loan
the company borrows.
Most common loan that I see from the financial
is a car loan
or loan for purchasing equipments.
The bank needs to assess
what is the principal and the interest rate payment?
And they will deduct that figure from your profit
because, before you borrow more money,
you need to service your existing loan,
including your company loan.
So, existing debt under your company or sole trader,
it will affect your borrowing capacity.
And lastly, they will look at the shareholder drawings,
let's say you keep drawing money from the company
then the company won't have sufficient cash
to repay the loan or shareholder drawings
will definitely be assessed very easily.
Now, apart from these,
if your business has already traded for more than one year,
they will look at the previous year
and they will see how
the year on year kind of comparison looks like.
They will compare the sales figure
and see what the changes are, gross profit,
normally it should be quite consistent,
if not, we need to explain so that they can
assess the business performance why is it dropped
or why is it increase.
Also fixed costs, they want to see
what's the change from year to year.
Fixed costs generally not change much
but you can have, let's say you hire new staff,
yourself when you may not reflect the investment
but your fixed costs has increased significantly.
So that's another kind of key numbers, they will look at it.
Lastly, they look at the balance sheet
and see if you have negative equity.
So negative equity means you owe more than you own.
So again, it's kind of a signal of your business cash flow.
They definitely want to know
what caused that and what's your plan?
So as you can see, there's a lot of factors
go into assessments, if you are self-employed.
It's important that you understand financials
so that we can have a better understanding
about how your business going
and also is easier for you to understand
why the bank assess your income in a certain way.
Now finally, I just want to quickly cover
apart from the financial statement,
what other documents you need to provide to the banks.
So they include your last six months bank statements
to show the sales figure and cost figure.
So it's just a transactional account for your business
and your business credit card statements.
Again that should have other expenses as well.
So they will take into accounts.
The next documents is your GST return
for the last six months.
They want to compare the sales figure
against your latest financial
just to see you know, what is the year to date look like
for your business.
And then they also require IR3
which is the shareholders personal tax summary
and IR4 for the company tax summary
for the corresponding year, financial year
that you provided financial statement for.
So for now is the 20 year and the 19 year financial
and the IR4 statements and IR3 statements.
And once we finished the 21 year will be 20 and 21 year,
both years.
Okay, as a business owner to borrow money,
I definitely require much more documentation
and more in depth assessment.
I don't want your assessment to be delayed
because you don't know this information.
So that's why I just want to share with you
most of the financial year end
so that you can prepare in advance
and fast track your progress.
Now, I'm more than happy to help you
review even the draft version if it become available
just to give you idea
what the indicative assessment outcome
and then you can finalize your accounts.
For any inquires feel free to get in touch with us,
we are happy to help you as much as we can.
Thank you so much.
I will see you next time,
bye bye.