Understanding Your Business Financial Statements
Understanding your business financial statements
How much effort do you make to understand your business financial statements? Owning and operating a business requires a diverse range of skills. In addition, some business owners either don’t enjoy or don’t have the interest to learn certain skills and so choose to hire someone to provide that skill or service for them. One of the most common skills to hire out or outsource is book-keeping as it can be complicated, tedious, repetitive and time consuming; if you know how to do it.
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Hiring out this service makes perfect sense as there are generally many qualified service providers available. However, what does not make sense and is therefore the point of this article, is for the owner of the business to be completely hands off. As we all know, the economy over the last few years has been extremely difficult. According to a local book-keeping expert I know, this difficulty has allowed some who provide book-keeping and accounting related services help themselves to the hard earnings of the business, especially if they think or know their work is not being checked.
By its nature, business is always busy with not enough hours in a day. If you outsource the record keeping and/or accounting services which includes giving access to the checking or bank accounts consider a couple of options.
The first option is to separate the book-keeping from the check writing and/or bank accounts. If the same service provider can write checks and/or get access to the bank accounts of the business and then create the financial statements that go to the owner or management, you can create a conflict of interest and put temptation where temptation does not need to be tested. Without exception, require check signing and bank account access to be kept separate from the creating and managing of any and all financial statements.
The second option is to create a process that allows the business owner to test the accuracy of the financial statements. Do not simply accept the financial reports as they are given to you on a daily, weekly or monthly basis because “they have always been right.” Ask for documents to support how the reporting document was put together be it with receipts, credit card statements or copies of bank statements. On occasions, when you get reports, go online to your bank and check the report corresponds to what you see.
The third and final option is to mix things up. Business owners tend to work from habits as they have daily, weekly and monthly activities that must be done for the business to be successful. It therefore becomes easy to do the same as you did last month as you become familiar with it, it saves time and it seemed to work. Where your financial statements and reports are concerned, mix up what you check and test so there is no complacency. Perhaps consider paying a third party to do an annual check for a specific number of items just so you know all is in order.
There is nothing worse than going to the time and trouble to sell your business, find a willing and motivated buyer but the deal can’t close because the financial statements of the business are wrong because the numbers don’t correspond. Equally, who wants to pay tax on financial statements that are not correct?
The book-keeping and accounting of a business is critical. If you are a business owner and this is not your strength, don’t ignore it or it can turn out to bite you…hard.
Andrew Rogerson specializes in helping business owners sell their business. This includes a business valuation, creating a marketing strategy, and handling all phases of the transaction including third-party lending, due diligence and escrow. He is the author of Successfully Sell Your Business available for immediate purchase and download.