Finance Book

Accounting is considered the necessary evil for most business owners. Understanding small business finance is a must for any entrepreneur especially one at the helm of a enterprise running full steam ahead.

More importantly, if you expect to get top dollar for your business when it’s time to sell, you need to stay on top of your accounting.

Any business broker can tell you that probably one of the biggest reasons a business will not sell is because their accounting is a mess.

Good accounting and keeping clean books will help prove to a buyer that you are telling the truth about your businesses financial claims.

If a seller claims to gross $500,000 in sales and has no real internal bookkeeping and his tax returns only show $300,000 – the buyer will not have confidence.

If the buyer is savvy and already has the background in your particular industry you’ll get an offer – but a substantially lower one. Low-Ball.

The fact of the matter is that the overwhelming majority of buyers are first-time buyers.

They are people leaving Corporate America due to layoffs, retiring, or just plain looking for something new. First-time buyers will have more hesitation paying fair-market value for a business that cannot back up its claims.

A business that can show most or all of their gross sales on their tax returns stands a much better chance of selling at a good price.

One way of looking at it is: businesses that do not report a healthy portion of their sales are “stripping value” as they are operated. On the other hand, when reporting more income on the tax returns, the business will receive more value later when it sells.

If your serious about selling your business some day, a couple of suggestions are to brush up on your small business finance and incorporate better accounting methods or consider hiring a bookkeeper or an accountant put your finances on system.

The other suggestion is simply to report more income. If you’re worried about higher taxes, talk with a competent small business accountant about taking advantage of all the available write-offs and tax laws.

This way, when the time comes to sell, you command a higher asking price and reduce your likelihood of qualified buyers losing confidence in you and your business.

By: Jason L. Pittman

An income statement a.k.a. Profit & Loss, is a summary of income received and expenses reported during a stated period. The periods are usually stated in monthly, quarterly, or annual terms.

A mid-month statement can misrepresent the data. For instance, if your business records most of your sales in the first 7 days of the month but does not record expenses till after the 20th of the month. This mid-month statement will overstate income and understate expenses.

Income can also be called sales or revenue.

Income can be subcategorized by type of sales. For example a fish store could have: Freshwater Fish, Saltwater Fish, Equipment, Tank Supplies, and Food. Breaking down income this way at the end of the period helps the owner look at her Income Statement and know the dollar total of each type of sale. Another tool is to know what percentage of your sales come from new customers versus existing customers.

One common mistake is to track income that is not earned by selling your business’ product or service in the income section of the statement; e.g. sales of assets, loan deposits, or tax refunds. Loan deposits are tracked on the balance sheet. Other income generated from other business activity such as gain on sale of assets and tax refunds is reported at the bottom of the statement after expenses in the area reserved for non-operational income.

When is a sale a sale?

A cash accounting method records the sale when the customer pays. An accrual method records the sale at the time the customer order is confirmed. Payment is handled separately on the balance sheet against the receivable generated from the sale. Why is this an issue? The accrual method attempts to match a sale’s income with its expenses to better determine if the sale was profitable. Cash accounting tracks sales and expenses as they are paid by your customer or you making it harder to determine if the sale was profitable.

When printing out your P&L use the feature (within software) called percent of income. What this does is divide each account for income and expenses by the total sales for the period. Monitoring this percent allows you to compare periods regardless of the amount of the income or expense. For example, if sales for the month are 50,000 for January and your payroll is 10,000, then 10,000 divided by 50,000 equals 20%. This translates to: for every dollar of sales you spend 20 cents for payroll. The next month your sales are 40,000 and your payroll is still 10,000. 10,000 divided by 40,000 equals 25% or for every dollar of sales you spent 25 cents for payroll. You can see how knowing the percent of income can be a valuable management tool.

By: Bruce D Hunter