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Every single business right now, especially those where the owner intends to sell, needs to maintain accurate financial records. It’s critical to operating a successful business.
Whether you’re still in the “small” business phase, or you’ve begun to experience exponential growth, the most critical documents you need are your income statements, cash flow statements, comprehensive income statements and your balance sheets.
Why Maintaining Accurate Financials Is So Important
The numbers included in those documents will play a massive role in the decisions you make, how you implement different strategies and will determine whether you succeed or fail.
They are the story that you’re telling the business world and to your buyers when you decide to sell the business one day.
If you are already planning on selling, the level of detail and the accuracy of your financial documents could make the deal or completely destroy it before you even get started.
#1 – Remaining Transparent
When it comes to your business’ financials, the smallest numbers can have the biggest impacts. Assets are going to drop in value from the date you purchased them, so you’ll need to deduct those percentages in order to show the depreciated values.
You need to record everything. You want to show your profits before tax, profits after tax, profits after interest, your asset depreciation and your tax payments.
Each of these areas will help you understand the performance of your business and help show your business’ strength to future investors.
If a buyer believes that you aren’t being transparent in your records, they’ll assume that you’re hiding other parts of the business, too. If you do get offers, they’re going to be far lower than you would receive if you were completely transparent in the records you’ve maintained.
#2 – Reducing Tax Liabilities
As a small business owner or corporation, your tax burden can be huge. If you’re generating high profit margins, the taxes you pay only get higher.
Many small business owners find themselves getting overwhelmed at the staggering amounts that they are required to pay and how little they have left once their taxes are settled.
You can use your financials to look for ways you can reduce your tax burden. If you can’t do it on your own, a good CPA or accountant can do it for you, as long as your financials are accurate.
If you aren’t able to reduce your tax burden, you could find your savings accounts getting rapidly depleted. The government could also fine you for the inaccuracies in your financials, which leads to even more penalties or audits.
#3 – Minimizing Errors
Detailed financials can help you spot mistakes that could be incredibly costly for your business, while also helping you spot misuse and misappropriation of funds before they become larger problems.
If your employees are ripping you off, the best way you can find these issues is in your financials. If there are errors being made, periodically reconciling your financials will help you identify those mistakes and get them taken care of.
Large businesses have large teams of people who are solely focused on reconciling the books. It helps them identify whether illegal activities are being committed by their employees.
Investment banking is a perfect example of how accounting errors and crimes often go hand-in-hand. Some inefficiencies have turned into larger scams and cost those corporations billions of dollars in losses.
Federal regulators now ensure that banks and other financial institutions constantly scrutinize their financials to avoid situations where scams and schemes can thrive. Your business should be treated the exact same way.
If you have made accounting errors, you could be leaving money on the table when it comes time to negotiate with a buyer. The money that you’re able to show in profits and assets will be multiplied in an investor’s valuation of your business, not your valuation.
#4 – Build Trust
One of the most important aspects of maintaining accurate financials is that you will build trust inside your company, especially if a buyer begins digging into your books. They will know that their money is going to be utilized properly.
It’s not enough for you to show that you are generating profits. Investors are going to want to see each of the different numbers to ensure that massive losses aren’t being hidden in other areas.
To help you understand this, look at corporations like Enron and WorldCom. Both firms were incredibly successful and were eventually closed down because they hid massive losses in their financial statements.
The world is becoming more concerned with companies maintaining accurate financial statements. Governments are spending more time regulating different accounting techniques while increasing the fines for being out of compliance.
#5 – Improve Your Payment Cycles
Without maintaining accurate financials, your accounts payable and receivable cycles could fail to be met in a timely manner.
Your employee’s wages, along with investor dividends and other expenses all need to be included, as well as your inventor and creditor payments. These are numbers you can monitor if you’re maintaining accurate financial documents.
You may be unable to stick to your obligations if your financials are poorly kept and have inaccuracies. For instance, if you owe on a loan, you’ll need to know how much of your payment is going toward interest. To run these calculations, you need to start with accurate figures.
#6 – Guide Your Decisions
When you need to make critical decisions, you will have to look at the numbers in your financials and verify your decision is the right one to make.
If those numbers are off, other areas of your business are going to be impacted, which creates an even bigger mess that you have to clean up when you finally realize what’s going on.
Your financials give you a window into how your business is performing and investors will look through that window to determine whether they want to buy your business should you decide that it’s for sale one day.
Your daily operations are also affected when you fail to maintain accurate records. It’s easy to make poor financial decisions if you don’t have accurate numbers to work off.
Being able to increase your profit margins requires you to maintain accurate financial records. Each small increase in your margins will lead to an exponential increase in the offers that you receive from investors.
The areas laid out for you here help emphasize exactly how important maintaining accurate financial documents can be. They’re critical for helping you paint a clear picture in your business which isn’t just important to you, but to buyers that are thinking about buying the business from you.
Guest post from Caroline Black at DigitalExits.com
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