There is no doubt that the current recession is as prolonged and severe as we’ve seen in many years. Hopefully, we won’t see it again for quite some time. Suppose you are a business owner whose business is not generating a profit. That may be challenging. However, if you also lack the capital to invest and sustain your business, that’s the worst place to be. If you find yourself in this place, you may be wondering about your options.
The first option is to take a real assessment of where you are. One of the best ways to do this is to consult with your CPA or accountant. Ensure your accountant does not merely file your tax return to meet the compliance requirements. Your CPA or accountant should also help you examine the numbers and understand how your business is performing.
What do you need to know?
Most business owners understand their gross sales. Some are adept at using this number to explain the success of their business. For example, have you spoken to a business owner who said: “Sales are up 20% on this time last year.” They say this with great pride, but that doesn’t tell the whole story.
Some business owners can tell you the net profit of the business. Net profit is simply what they pay taxes on, which is gross sales minus the cost of goods sold, minus expenses. Some business owners like to say, “Our bottom line was up 10% compared to last year.” This is good news, but that also may not tell the whole story.
A few business owners can get into their financial statements and understand what’s happening in their business. For this business owner, it’s the Profit and Loss Statement. If they prepare this document themselves, they are aware of what’s going on. However, many business owners get help from a family member or at least a bookkeeper. However, that leads to a couple of points.
Small business theft
The first point is that theft in small businesses, due to the recession, is at its highest level in many years. This is because the person handling the books can manipulate the accounts by stealing funds that the owner is unaware of. They can steal funds through a false invoice or by purchasing certain goods, having the business pay for them, and then returning the goods to receive a refund, keeping the money.
There are many creative ways for someone to find money if they want to. So, how do business owners protect themselves? One way for the business owner to do this is to conduct a line-by-line review of the profit and loss statement at least once a month. Any item that appears, and the owner can’t remember what the expense was for, can be challenged to find an acceptable explanation.
It can then be wise to conduct random tests.
Random tests ensure that all expenses are accurate and complete. For example, verifying that the new computer the salesperson requested is still available or that a special order of inventory has been received and delivered. Testing the monthly profit and loss statement, followed by random checks, fosters good discipline and helps the owner stay on top of the business’s critical aspects; however, this doesn’t tell the whole story of the business’s financial health.
A Profit and Loss Statement shows the health of the business
The health of the business is revealed by working with the Profit and Loss Statement and the owner, who can read and understand the Balance Sheet.
The balance sheet is the document that explains how money comes into and leaves the business. It shows what is owed, and it shows what the business owns (or its assets). It reveals the owner’s draw and investments, as well as basic information about Accounts Receivable and Accounts Payable, and tracks these categories. If Accounts Receivable is growing, then Accounts Payable may also increase; however, they should maintain consistent ratios.
If a business owner can understand a healthy balance sheet, they are well on their way to maintaining and growing a successful business. Understanding a balance sheet doesn’t mean you need to become a CPA. It means you need to ask questions until you “get it.” Most business owners shy away from understanding the balance sheet, as it can be too confusing. However, if you ask the same question month after month, it will eventually make sense.
Are you thinking about selling your business in California? Would you like to know the value of your business? For more information, please visit my website, Business Valuation.
For more immediate assistance, you are welcome to send an email to Andrew Rogerson or call me toll-free at (844) 414-9700.