Five Checks to Determine if Your Financials Are in Order

When selling a company or seeking investment, there is no larger deterrent to a premium valuation and a smooth closing than messy financials. For growth companies running at full speed, maintaining accurate and up to date financial statements can easily slip to the bottom of the task list. While it is a common mistake, poor financial reporting will hinder your ability to make informed decisions on managing and growing your company. It will also destroy buyer/investor trust in your company as a potential investment.

The Five Checks

Financial reporting may be a problem for your company if you have any of the following issues:

You do not have up to date monthly financial statements readily available

You do not track financials monthly and/or you are several months behind in reporting. Strong financial departments often produce monthly financials by the 10th of the following month. Closing later in the month reduces the usefulness of financial reporting.

You are not able to track revenue with expenses

You are not sure if your expenses are generating sufficient revenue to achieve profitability goals. Properly recognizing revenues and expenses in the month they are earned (known as accrual accounting) gives a better picture of profitability than cash-based financial reporting. Cash based financials can hamper management’s ability to make decisions.

Your financial statements are difficult to follow

Someone outside of your accounting team cannot easily understand your business model and financial position from looking at your financials. Clean reporting is organized by business unit or division and is consistent over time. Instead of making users scratch their heads, clean reporting enables high-value conversations around the business.

Your financial team does not have clearly defined processes

Lacking a standard set of procedures, such as bank account reconciliations and a monthly budget meeting, your financial reporting may contain significant errors. A written set of financial controls creates peace of mind.

You run personal expenses through your business

Lastly, running significant personal expenses through a business can further complicate matters, as buyers want to understand solely the costs to operate a business. The more of these non-business related expenses that flow through the P&L, the less credit a buyer will be willing to give to the seller for each addback.

Without clean financials, prospective buyers/investors cannot conduct the level of financial analysis required to determine if they want to move forward with an opportunity. If you are unable to provide monthly financials, buyers may be forced to pass or delay a decision. Without confidence in financials, buyers often hedge their offers downward to compensate for the risk of the unclear and inaccurate financials. The duration to close a transaction may also be elongated, as significant effort must be exerted in the diligence phase to validate the accuracy (or get as close as possible) of the unkempt numbers.

Maximizing Value

For business owners seeking to maximize their valuation and minimize the stress of financial due diligence, we advise being sure you can answer yes to the following four questions:

– Do I have audited and GAAP compliant (or at minimum prepared and organized per industry standards) financials?

– Are monthly income statements, balance sheets, and cash flow statements are readily available?

– Does my company regularly update and track performance against a budget/forecast?

– Have I established monthly financial Key Performance Indicators that are used to track and evaluate performance?

If you can answer yes to all, breathe easy as you have positioned yourself well. If your answer to any of the questions were no, we can help understand your current operations and set you on a path to success. Schedule a meeting today!

– Guest Article by Chris Weingartner