Improving Credit – Susan's Reflections

Know Your Financial Statements—The Personal Financial Statement

The Personal Financial Statement (PFS) is an important document that every business owner should understand. Unlike other financial statements, the PFS reflects the financial health of the business owner rather than the business itself. Many business owners mistakenly believe their personal financial situation is separate from their business’s financial health. However, that is not the case.

A business owner’s personal finances play a crucial role in determining whether a lender will approve a small business loan. Lenders review the PFS to assess if the borrower:

Is managing their personal finances well
Has cash to inject into the business
Has collateral to support the loan

Moreover, landlords and franchisors often require business owners to demonstrate financial responsibility before entering into lease or franchise agreements. Additionally, a PFS is necessary for certain SBA certifications and for securing SBA-backed loans.

Many business owners struggle with understanding how to complete the PFS. To help, I’ll guide you through the process, using the SBA’s Form 413 as the reference. While each bank may have its own version, most will accept the SBA version.

Guidelines for Completing the Personal Financial Statement

Assets:

Cash on Hand and in Banks: Total cash on hand and in your bank checking accounts.
Savings Accounts: Total of savings accounts, including CDs and money market accounts.
Retirement Accounts (IRAs, etc.): Total all retirement accounts. Though this money cannot be used as collateral, it’s still an important asset.
Accounts and Notes Receivable: Money owed to you, such as tax refunds, security deposits, or maturing CDs.
Life Insurance: Include only the cash surrender value of life insurance policies (the amount you’d receive if you cancel the policy, after administrative costs).
Stocks, Bonds, Real Estate, Automobiles, and Other Personal Property: List at current market values.
Other Property and Assets: Includes boats, trailers, collectibles, and jewelry.
Business Ownership: If you own a business, include its value, calculated by summing cash, equipment, and inventory. Enter this as “Other Assets.”

Liabilities:

Accounts Payable and Notes Payable: Includes unpaid bills, outstanding credit card balances, and bank loans (excluding mortgages, student loans, and auto loans).
Auto and Installment Loans: Include the total debt and the monthly payment for auto loans, student loans, or other installment loans.
Life Insurance Loans: If applicable, list any loans against life insurance policies.
Mortgage Liabilities: Include the total debt secured by any real estate, including first and second mortgages and home equity loans.
Unpaid Taxes: List any unpaid income tax, property taxes, and personal property taxes.
Other Liabilities: Include private loans from friends or family, legal judgments, and unpaid child support or alimony.

Net Worth: Net Worth = Total Assets – Total Liabilities

Additional Sections to Complete

Once you’ve filled in the basic table, additional details about your assets and liabilities are required in the sections below.

Section 1: Income

Salary: Include wages or salaries you regularly pay yourself from the business and any other employment.
Investment and Real Estate Income: Provide details of income from investments or properties.
Other Income: This might include disability income, foster care payments, and retirement income (but not alimony or child support).
Contingent Liabilities: Include any loans for which you co-signed, or set-aside funds for contingencies like lawsuits or IRS audits.

Section 2: Loans and Credit Cards

Provide details on all outstanding bank loans, credit card balances, student loans, auto loans, and personal loans.

Section 3: Stocks and Bonds

Provide details on stocks and bonds owned, including the number of shares and their current values.

Section 4: Real Estate

Include all properties owned—both free and clear, and those with mortgages. Use online sources like Zillow to estimate current property values.

Section 5: Other Assets

Describe the assets listed in Accounts Receivable, Other Personal Property, and Other Assets. Include the asset and its value, e.g., “2024 tax refund expected: $1,450” or “2018 fishing boat: $9,000.”

Section 6: Taxes Owed

Provide details on any unpaid taxes owed to the federal, state, or local government. If you’re on a payment plan, include the balance and payment terms.

Section 7: Other Liabilities

Provide details on any other liabilities not already covered in the previous sections.

Section 8: Life Insurance Policies

List the face value of your life insurance policies and the cash value you would receive if you cashed them out. If you’ve borrowed against any policies, include those details here as well.

Be sure to sign and date the form, and include your Social Security Number. If you are married, your spouse must also sign and date the form.

When lenders, landlords, or franchisors review your PFS, they’re evaluating whether you manage your personal finances responsibly, if you’ve taken on too much debt, and whether you can meet your financial obligations. Managing your personal finances well is critical, not only for your own peace of mind but also to demonstrate your ability to manage your business effectively.

Conclusion

The Personal Financial Statement is a key tool in securing financing for your business and demonstrating your financial responsibility to potential partners. By completing it accurately, you’ll be better prepared for any financial assessments that come your way. If you have any questions about how to complete your PFS or need further assistance, feel free to drop a comment below or email me at susan.ball5@aol.com! I’m happy to help you navigate this important aspect of your business finances.

Know Your Financial Statements—Accounts Payable

Most small businesses have a number of unpaid bills at any given time. Inventory has been delivered, but the invoice isn’t due yet. Utility bills arrive two to three weeks before the due date. Retail sales tax has been collected but not remitted to the tax department. Payroll withholding taxes are being held in escrow until it’s time to file quarterly reports. These unpaid bills are known as accounts payable.

It’s crucial to keep track of your accounts payable so you know how much is owed, to whom, and when the bills are due. Managing your accounts payable effectively offers several benefits. A statement of accounts payable will help you achieve this.

Benefits of a Statement of Accounts Payable

Effective Cash Flow Management
Accounts payable should be included in your cash flow statement for the month they are due. This ensures that you’ll have enough cash on hand to cover those bills. It also helps highlight months where a shortage might occur, allowing you to arrange a line of credit to meet forecasted shortfalls.
Avoidance of Late Fees and Interest
Tax authorities impose penalties for late filing of quarterly tax payments and monthly sales tax reports. Banks, utility companies, and suppliers may also charge late fees or interest for bills that aren’t paid on time.
Take Advantage of Discounts
Many suppliers offer discounts for early payment. A statement of accounts payable lets you easily spot vendors offering discounts, so you can ensure bills are paid on time to take advantage of these savings.
Maintain Good Credit and Vendor Relationships
Timely payments are key to maintaining a strong credit score and healthy relationships with lenders and suppliers.
Preparation for Loan Requests
If you need to borrow money or establish a line of credit, lenders will often request a statement of accounts payable. This statement helps them evaluate your level of debt in relation to industry norms and your ability to cover outstanding debts if your revenue declines.

Creating a Statement of Accounts Payable

A statement of accounts payable is essentially a table that includes:

Name of creditor
Account number or invoice number
Invoice date
Due date
Amount owed

Creditor	Acct/Invoice Number	Invoice Date	Due Date	Amount
Bill 1
Bill 2
Bill 3
Bill 4

Tips for Managing Accounts Payable

Managing accounts payable effectively is crucial for maintaining healthy cash flow and good vendor relationships. Here are some best practices to consider:

Separate Regular and Occasional Bills
Keep distinct charts for bills that occur regularly and those that are occasional. This makes it easier to track and manage.
Record Monthly Bills on Your Cash Flow Statement
Include occasional bills in the months they are due, not just the regular ones. This will help you get a clear picture of your upcoming cash flow needs.
Set Up Automatic Payments for Fixed Monthly Bills
Set up automatic payments for bills like rent, loan payments, cell phone bills, and subscriptions that are predictable and have a fixed amount.
Estimate and Adjust for Variable Bills
For bills that vary, like utilities or discretionary expenses (marketing, for example), use an estimated amount in your cash flow statement and adjust for seasonal variations.
Automate Bill Payments When Possible
If possible, have bills go directly to your bank. This simplifies the payment process, especially if you’re using a bill-paying app.
Track Infrequent Bills
For less frequent bills, like insurance payments, set up automatic payments to ensure you don’t overlook them.
Balance Your Checkbook Regularly
Schedule weekly or bi-monthly checkups to balance your checkbook and confirm that all bills have been paid or are scheduled for timely payment.
Forecast Cash Flow in Advance
Predict your monthly cash balances several months in advance to determine if sufficient funds will be available during slower months. If you forecast a shortage, take steps to ensure enough cash is available, like establishing a line of credit or injecting more capital into the business.

Conclusion

A statement of accounts payable is a simple but powerful tool for tracking your bills and maintaining healthy cash flow. By following the tips above, you’ll be able to manage your accounts payable effectively, avoid late fees, and maintain good credit and vendor relationships.

If you have any questions about managing your accounts payable or tips for creating your own statement, feel free to drop them in the comments below. I’d love to help you better understand this important aspect of your business finances!

Helping Your Child Establish Credit

When I graduated from high school, my parents gave me a sewing machine as my graduation gift. The gift extended beyond the device, and my mother used this opportunity to help me establish credit and a good credit report. Sewing was a skill my mother taught me, and she knew that I enjoyed it. A few days after graduation, Mom and I went to the store and picked out a cabinet for the machine, which I would pay for myself. I completed a credit card application and put 20% down toward the cabinet purchase. A few days later, I received a Singer credit card in the mail. When the bill arrived, Mom had me write a check to pay the balance in full. So, at 18, I had a credit card with a record of promptly paying the debt in full.

My parents set a good example to use credit sparingly and to maintain an excellent credit record. In those days, gasoline companies and department stores issued most credit cards. They were used only in the store that issued the card. General-purpose credit cards, such as Visa and Discover, were rare in those days. I do not recall ever using the Singer credit card, but having it allowed me to apply for and receive a Sears credit card while in college. I used that card sparingly and promptly paid the balance in full upon receiving each bill. My mom invested in a gift that she knew would benefit my future.

When my sons began driving, I co-signed for a credit card for each of them. I wanted to ensure that they never got into a situation such as needing gas and not having any money. They had limits on how they could use the card. I could check the card online at any time, and my husband and I expected them to pay their balances in full each month. If the bill was due and had not been paid, I transferred money from their savings account to pay the bill. We discussed their spending habits regularly. With a bit of guidance, they maintained excellent credit during college. When our first son to marry wanted to purchase a house, the mortgage lender was impressed that a twenty-two-year-old had a credit score in the high 700s.

A wonderful gift any parent can give their child is to help them establish good credit. Teaching the principles of financial integrity and maintaining good credit is critical to helping your children transition into adulthood.

Here are some guidelines to help parents get started on training their children to establish credit:

Model responsible use of credit.
Have family discussions on your budget regarding discretionary spending.
Don’t assume your child has learned what they need to know about credit in school. Talk to your child about establishing and maintaining credit.
Help your child to develop self-control. Early in their lives, teach them that you cannot afford to buy everything they want. Discuss with them the need to make choices and prioritize needs over wants.
Demonstrate self-control by saving for larger, discretionary purchases. Share information with your child on how your savings are accumulating and how soon you will be able to make your purchase.
Help your child develop a savings plan when they are young. Putting aside even a small amount each week or month can result in a tidy sum by the time they graduate high school. This money can be applied to college or their first car.
Co-sign for a credit card for your child and discuss their spending habits each time the credit card bill comes. Discussions should be positive and affirm good decision-making. A good time to do this is when they start driving and going places without you.

Children do not instinctively know how to establish credit and maintain a good credit record. They must be taught, and it is your responsibility as their parent to instill good credit decision-making skills. Good credit will pay great dividends in your child’s future. “Train up a child in the way he should go, and when he is old, he will not depart from it.” Proverbs 22:6

For more tips to help you manage your financial resources, please see my other blogs in the Finance tab. My book, Honoring God with Your Money, is full of guidelines to help you use money in a way that builds true wealth. Click here to sign up for my quarterly newsletter: https://susaneball.us5.list-manage.com/subscribe?u=c4402ad22eed92a13b211a5ed&id=db5b79b8b5

Minimizing the Costs of Credit Card Balances

Americans have a love affair with credit cards. They make life easier while also making it easier to overspend. Studies reveal that a purchaser will spend an average of 20% more on an item when using a credit card than when paying with cash.

Credit card usage peaked in the fourth quarter of 2008, as the nation entered a severe recession, with balances reaching a then-high of $866 billion. Credit card balances fell significantly over the next 5 years. As the economy recovered, however, the use of credit cards and credit card balances began to rise. Today, credit card balances are approaching the $1 trillion level. The average consumer carries a credit card balance of $7,279 (Lendingtree.com). Fifty-three percent of credit cards being actively used are not paid off in full each month. The average interest rate of these balances is 20.92%, and the average interest rate being offered to new borrowers is 23.65%.

The good news is that most Americans make regular credit card payments, and only 2.25% of credit card balances are delinquent by 30 days or more.

The minimum credit card payment is typically about 2% of the balance. On the average balance of $7,279, the minimum payment would be $86. At that payment and an interest rate of 20.92%, it would take a borrower 28 years and 3 months to pay off the debt. The total interest paid would be $27,776. In this scenario, the $7,279 in debt would cost the borrower $35,055.

When a consumer (that’s you) begins to take an active role in their financial future, they can minimize the interest on credit card balances. Remember, interest is handing part of your hard-earned paycheck to someone loaning you money. If you are not paying off your credit card each month, you need to determine why you carry a balance.

The steps below can help you make advances on getting a handle on your credit card debt:

Always pay at least the minimum balance on time.
Set up automatic payments to ensure that payments are always made on time.
Pay more than the minimum balance whenever possible.
Consider the actual cost of debt before making large purchases on credit cards.
If your balances are on multiple credit cards, prioritize paying off the card with the highest interest rate first.
Live below your means so that you will have some money each month to put toward your credit card balances.
Create a budget to live within your means. (Refer to my past posts on budgeting)

To learn more about how to manage your money and pay off debt, please click the Finances categories tab to find many blogs on money management, budgeting, and stewardship. My book Honoring God with Your Money is a great tool for financial money management.

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