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Business Valuation and Accurate Accounting

November 14, 2016

 

Accurate financial information and data is crucial not only in terms of a small company’s operations but also with respect to the overall value of the business. Without accurate financial and accounting reports, many small business owners and startups will not receive the appropriate valuation of their company when it comes time to either raise capital from investors or sell the business. This is especially true here in the San Francisco Bay area due to its increased scrutiny on financial numbers.

 

As we are an outsourced CFO to a variety of businesses and startups, we often see this accounting deficiency leading to a valuation shortfall. However, it’s never too late to fix and improve financial reporting and processes. Recently, an article in a regional newspaper provided an overview of an actual example of how accurate accounting increased the business valuation by 100 percent.

 

In this example, a certain business owner generating close to $10 million in annual sales had rather sloppy accounting.  This was reflected in huge swings in profit and losses in the monthly Income Statements (i.e., the monthly P&L’s). While the company was profitable in the long-run, inaccurate accounting and financial processes were obscuring areas for improvement.

 

For example, this company was selling large, customer machinery that took time to complete and delivery. However, the business was not appropriate accounting for costs as they were accruing. On the flip side, the company was also not invoicing and billing (or properly recognizing revenues) in a timely way. In actuality, the profitability of the company was actually much higher than was being reflected in the inaccurate accounting and financial reports.

 

As a result, when it came time for the business owner to sell the company and realize the fruits of his many years of labor, the offers went up by more than double the original bids.

 

Here’s some great advice from the article:

 

“Buyers like clean numbers. Be consistent in how you record work. Be able to show margins by job and by division. Identify three key performance indicators that you can track from year-to-year. Most sellers don’t do that, and buyers have to dissect the numbers as best they can.”

 

It is very hard for potential buyers of a business to properly value a small business or startup. Having accurate, easy-to-understand financials along with solid financial processes is a key foundation to achieving the right value for the business.

 

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