Don’t let conducting your company’s finances give you a run for your money. Whether your business is a local nonprofit or a national corporation, it’s equally important to keep your company’s finances in line by using clear communications, processes and considerations. Conducting your organization’s finances in this way will only ever add value. But with confusing regulations and standards, it can be difficult to navigate the intricacies of finances.
(To learn more about our Transaction Advisory Team’s methodology for formulating these recommendations and for more ways you can maximize the value of your business, check out the preceding articles in this series: Maximizing Value Through Strategy, Maximizing Value Through Operations and Maximizing Value Through Legal Issues.)
How can you avoid the most common financial-related pitfalls that could devalue your business? It all has to do with increasing the value of your business through financial considerations.
The following five recommendations are my two cents on the top ways to maximize your business’s value through how you conduct finances.
1. Accounting cannot run your business, but you cannot run your business without accounting.
This is an old saying people use in our industry to emphasize the importance of getting your books and records as clean as possible. You should never make key business decisions based only on accounting rules, but you certainly need to properly account for those business decisions once they are made.
Make sure to study the rules, or hire a qualified CPA, to determine the appropriate accounting treatment for the various transactions you enter into. You should also produce monthly financial statements (balance sheet, income statement and statement of cash flows) on a GAAP (generally accepted accounting principles) basis, which will require you to record various accruals, such as paid-time off and payroll, but also establish good cutoff from period to period. You should also clean up the balance sheet by removing any old, irrelevant assets or liabilities and ensure your equity properly rolls forward from period to period.
Once you have accurate financial statements, it’s imperative that you study them for any irregularities or trends. The faster you produce accurate statements, the better the data will be for making future decisions. While the statements are looking into the past performance of the business, if you can produce the statements within a few days of a month end, the information presented in the statements will still be relevant and allow you to stay forward-looking. Too often, business owners either do not produce financial statements or take too long to compile them.
It is always a good practice to create a budget for the year and track your progress against it from month to month. When preparing the budget, try to be as granular as possible and make sure it lines up with your overall business strategy.
2. Understand revenue recognition rules, and account for your customer contracts properly.
While this point is naturally embedded in the first point above, I have created a separate point for it to emphasize its importance. All too often, our team gets involved in transactions only to find that the company was recognizing its revenue incorrectly, as defined by GAAP, and it must be adjusted. When that happens, it usually results in less overall enterprise value and requires re-trading of the originally agreed-upon letter of intent (LOI). Let me tell you, this is never a good thing!
To eliminate surprises, hire a CPA to review your contracts and determine the appropriate accounting treatment. Spend some time organizing your customer contracts and dividing them into subcategories of similar terms and conditions. Once the appropriate accounting treatment is identified, translate that into your general ledger, and provide supporting documentation in your files.
Even further, if possible, have an attorney review your customer contracts, and develop a standard template to utilize with all customers. I see too many companies that use customers’ templates only to find that the accounting rules force them to account for each contract differently, which naturally will present opportunities for mistakes and misstatements to occur.
3. Avoid running personal expenses through the business.
Oftentimes, business owners will use the company’s checking account for personal purposes. This practice may be frowned upon by regulatory agencies and potential acquirers. If you do run personal expenses through your corporate ledger, you should keep a good record of what they are for and the amounts. Do not attempt to expense these items for tax purposes; this is, first and foremost, illegal, but it will also will be negatively viewed by potential buyers of your company because it will make them wonder what other pitfalls may be embedded in the business. A good due diligence team will always find these items, so it’s best to present them at the beginning of the negotiations.
4. Develop key performance indicators (KPIs), and track them on a monthly basis.
Make sure you understand the various measures of success in your business, and develop KPIs around those measures in an easy-to-read format. Begin tracking the data used to calculate the KPIs, and ensure they are accurate at all times. I mentioned the importance of reviewing your financial statements in the points above, but it is equally, if not more important to review KPIs as often as possible. These are the triggers in your business that will make or break you.
You really only need four to seven KPIs and having any more than this could be overwhelming for you and your key managers. Every industry is different, and the KPIs will need to be specific to your business. Some of the more commonly-used KPIs are:
- Gross margin
- Return on sales
- Net working capital or current ratio
- New contacts rate
- Client acquisition rate
- Churn rate
- Employee and/or customer satisfaction
5. Make sure to plan for taxes.
Consider the tax impact on your business and on the potential sale of your business. You may be shocked to know that potentially 40 percent or more of your net proceeds from a sale could be due to the Internal Revenue Service (IRS)! There are tax strategies, credits and incentives to help alleviate some of the burden, but those strategies need to be implemented sooner rather than later because many of them have a time restriction.
The entity structure (partnership, corporation, etc.) is the first factor to consider in determining if you have the most efficient tax alternatives for your company. Enlist the assistance of a qualified tax attorney and CPA to properly analyze all the facts and circumstances.
Furthermore, make sure that all of your tax filings, including federal, state and local, are current and completely accurate. Too often, I find companies that fall behind in filing their tax returns or do not realize they even need to file a tax return in a particular state. This situation will absolutely be identified during due diligence and will most certainly result in a hold back (i.e. escrow) from the purchase price for potential liabilities to taxing authorities.
Have you considered state and local tax (SALT) issues? These have been in the news lately as state and local governments crack down on companies doing business in their jurisdictions. If you have not considered this topic, you should contact an expert as soon as possible.
Managing your business’s finances will not only add value in the immediate time, but it can create opportunity for your company to thrive and even save money in the future. Planning, executing and tracking finances can be a challenge, but the reward is great.
If you still have questions about adding value to your business, connect with me or another member of Warren Averett’s Transaction Advisory team who can offer insight.
Hanny Akl is a Member of Warren Averett and leads the Firm’s Transaction Advisory Services practice, which focuses both on buy-side and sell-side transactions along with advising owners on creating value within their businesses. Click here to contact him directly.