Why should a business owner care about financial management? Part 1
What to know to maximize your business value for yourself or a buyer.
Most business owners want to run their businesses and don’t want to be financial managers. As they grow the business, they learn that to achieve their goals of making money (or adding value), they will need to know about financial statements, taxes, and cash flow. Armed with that knowledge an owner can make good decisions about sales, profits, costs, etc., and the tradeoffs between them. Goals that reflect the business strategy can be set and monthly/weekly financial reporting will reflect how well the business is tracking to those goals. The business owner won’t need to know how to prepare the financial reports (although simple examples are helpful learning tools) but will want to understand the elements and information to make solid decisions.
As I work with landscape company owners who are planning their exit/transition from the business, whether to sell to a third party, to insiders or otherwise, I get to ask questions like,
What are your annual revenues? What lines of business are you in? What’s your gross profit margin (see Bill and Ed’s new video series on Gross Margin)? What is your net income? What does your cash flow look like? Are these trending up or not and why?
Most owners have a good sense of these numbers. However, would you be shocked to hear that these examples of “real life” comments are more common than you think?
“I’m not sure how much money we are making. I can pay the bills, although I do have some debt.” Typically, these are small business who are so busy with the challenges of running the business that if they can keep going, they don’t look at the financial reports until they get a break.
“I don’t really get into the numbers myself. My CPA does the taxes. My bookkeeper enters the information into QuickBooks.”
Most companies have a bookkeeper who tracks the revenue and expenses, but with a few exceptions, your bookkeeper isn’t in a position to analyze whether your business is performing up to your standards. Most importantly, how do you know what your bookkeeper is doing is correct?
If you haven’t hired someone to do this work, you are probably missing important financial controls from a quality and management control perspective. Your CPA would have to be engaged to do this work since it would be beyond tax work. This person or your financial advisor can do a monthly review with you and your management team to track reported results. In addition, you could ask for occasional spot checks to be sure your bookkeeper’s entries are correctly made. If you don’t have a Controller or CFO, and you yourself are not into the numbers, it’s even more important that you have an “Outside In” advisor on board.
“We’ve had a minor/major problem with embezzlement in the past. A long-term trusted employee started taking money from the company/from a vendor/etc. and we only found out because of some outside trigger”
This happens to so many companies I would venture to guess that more than 50 percent of small business owners have experienced it. (I’ve seen it happen in many other private companies as well.). It usually starts with a long-term employee who is completely trusted. While the stolen money can be damaging, by far the worst impact is the betrayal of trust that deeply affects the owners and co-workers. The remaining accounting staff or new bookkeeping employees will welcome having an outside third party as a resource for questions and a form of quality control.
I know these examples probably aren’t you, but in the interest of those who don’t know, in the next few weeks we will cover some of the basic financial knowledge that you need to know along with posts covering a few of the ways you can positively impact your business’ value for yourself or a buyer.
If you’d like to discuss how to your company’s financial statements and how your results might look to a potential buyer while you are considering your goals for a graceful exit, feel free to give us a call. It’s never too early to explore your options before making your plan whether that is this year or in three to five years.
You can reach me via email: [email protected] or on my cell phone at: 224-688-8838.
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