The Importance of Accurate Financial Statements

Over 4 years as a Part Time CFO, one disturbing trend that I see continuously is the large number of business owners who have inaccurate financial statements.

 

Two things business owners want to know no matter how interested they may be in financial information are: what their sales are, and what their net profit is. Even business owners the most detached from financial information will want to know those two metrics. If you have inaccurate financial statements, you can forget about knowing those two metrics accurately.

 

There are several beneficial points to having accurate financial statements:

 

Making better business decisions – It’s impossible to make decisions regarding, among many other things, what vendors pay, pricing, capital expenditures, collections, or inventory purchases without accurate financial statements.

 

Getting bank financing and obtaining leases – If your financial statements can back up what you tell the bank, they will take you a lot more seriously. And adversely if your banker sees an inaccurate financial statement (which they can usually tell from a correct one at a glance), your chances of getting a loan diminish greatly.

 

Keeping bank financing – Credit lines that need converting to term debt are something most business owners have to take care of. Without an accurate financial statement, best-case scenario is you making your banker nervous and the worst (and most likely) scenario is that you won’t get your credit line extended at all and you’ll have to pay off the credit line immediately.

 

Allowing better financial analysis – There’s no basis for strategic planning or problem solving without an accurate financial statement. You can’t do a business and cash flow forecast or solve cash flow problems, for example. You also have no way of knowing with certainty whether or not a change in your business model is working for your business.

 

Better Estate Planning – It’s critical that your financial statements are accurate if you want an effective estate plan.

 

More Security when selling a business – Critical to its valuation is the amount of earnings a business has. A buyer will discover inaccuracies in your financial statements during the due diligence process, putting your deal in jeopardy.

 

Similarly to selling a business, accurate financial statements are pivotal in all of the following situations, because inaccuracies discovered later in these processes could be detrimental to any deals being made to your benefit:

Shareholder Buyout or Disputes

Employee Stock Ownership Plans

Litigation or Divorces

Shareholder Buy and Sell Agreements

 

A very cost effective way to keep the accuracy of your financial statements in check and alleviate any problems you may have with the aforementioned events is hiring a Part Time CFO.

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