On the top of the value driver list is having solid financial systems and therefore accurate financial statements. Too often we must use the term, “small business accounting” to explain why there’s confusion over the financial statements.
When writing a purchase and sale agreement attorneys often ask for GAAP (Generally Accepted Accounting Principles) statements, which aren’t usually done by small businesses. The preference is often, “historical accounting practices.” Within a company’s accounting practices there should be:
- No blending of the personal and business checkbooks. A client recently told me about any non-essential (personal) business expenses, “Our CPA loves us because we don’t do any of that.”
- Careful attention to customer deposits, pre-paid expenses, work in process, etc.
- Matching cost of goods sold with job revenue. My first thought when seeing monthly gross margin all over the place is to ask if the business records material costs when the sale is made (as it should be) versus expensing when the purchase is made (not putting purchases into inventory and then out when invoicing the customer).
There are a quite a few more of these things that can trap someone looking at the business. The mantra should be, the cleaner the books, the better.
“I put a dollar in a change machine. Nothing changed.” George Carlin