What is your story?
What does your financial statement tell the reader about your company?
In the past year, I have had multiple closely-held businesses approach me to assist with financial reporting as the owners were looking for a reasonable valuation of their shares due to the following events:
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- • Sale to an outside party
- • Sale to a family member
- • Death of a shareholder
- • Award to an employee
- • Gifting of shares
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The value of your business ownership will be largely driven by the Company’s financial statements. Generally, the buyer and/or a valuation specialist will require a minimum of three years of financial statements prepared on the accrual basis of accounting.
Converting Cash Basis Reports to Accrual Basis
Do you report for tax on a cash basis? This is not a problem as the statements can be easily converted. For example, the following accounts would typically appear in accrual statements:
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- • Accounts receivable
- • Prepaids (insurance, rent, etc.)
- • Fixed Assets-book depreciation rather than accelerated tax depreciation
- • Accounts payable
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- • Other accruals
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- – Vacation
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- – Payroll
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- – Taxes
In the simplest of terms, accrual basis statements will recognize revenue, generally, as it is earned, not delayed until you receive payment. Expenses are recorded as you actually incur the cost, not necessarily when you pay the bills.
Why Financial Statements Matter – Even if You Don’t Plan on Selling
Even if you are not considering selling the business in the near future, you should consider what story these statements tell to an outside party. Consider the design of the financial presentation, with an emphasis on utilization of information for decision making. The presentation should be clean and easy to understand. Expenses should be only ordinary and necessary business, and if shareholder fringe benefits are included, these should be easily identifiable.
It has been my experience that most business owners are not quite certain what a balance sheet or profit and loss statement means. I remember at a Vistage meeting, an organization for executive leaders, a business owner held up his balance sheet and said, “I’m not sure what this is or what it means, so let’s go right to the profit and loss statement.”
If you feel like that business owner, feel free to contact me to discuss how to read financial statements for your company. I frequently meet with senior management to assist with financial statement design and interpretation. The clients I have worked with find value for the time spent as it helps focus on the numbers throughout the year, not just at year end.
How We Can Help
So what is your story? First, let your financial statements tell it clearly. Then, work to make it the best story it can be! For more information on DHJJ’s Business Advisory services, please contact DHJJ at 630-420-1360.
