Accuracy is Essential to Value.

The integrity of your financial records can directly affect the value of your business. Here are a few anecdotes from our case files that may get you thinking about challenges that confront small business owners everywhere.  Some may relate to your own situations.

Issue: Fixed Assets that Never Die
Companies require furniture, fixtures, and equipment to operate. These are purchased, accounted for as assets on the balance sheet, and depreciated over time.  Over the course of several years, many assets wear out or become obsolete. Ultimately, those assets are physically discarded or should be.  (We’ve seen some old “stuff” moldering in store rooms, drawers, or behind the shop).  When items no longer exist or have any practical value, an accounting entry should be made that removes the asset and related depreciation from the balance sheet so that your “books” match what is actually in your company.

During a recent valuation for a 35 year old business, we requested the owner walk through his business with the printout of all of the items on his Fixed Asset Schedule and check off each item he could touch.  What do you think was the result?  The Schedule indicated $300,000 of fixed assets at cost, but he could only find $120,000 worth.  This is because old items were never removed from the balance sheet.  Nothing was ever subtracted.  Accurate financial statements are an essential aspect of a well-run company, they are also elemental for business valuation and buyer due diligence purposes.

Issue: Inventory Sink Hole
Consider the on-hand inventory required to support daily sales operations. Depending on inventory availability from suppliers, this might be as little as a few days’ supply, likely not more than a week or so.  Since “fresh” inventory is a cash equivalent (returnable) and “old” inventory is a declining asset in that it becomes out of date (not returnable) over time, it is important to manage it.  That requires entering purchases and sales daily, plus reconciling the “book” inventory with your “physical” inventory at least once per year.

While facilitating a business sale, we calculated that an average inventory balance of $5,000-$10,000 would be reasonable; however, this company had $117,000 of inventory listed on their balance sheet.  Investigation revealed a current inventory of about $10,000, about $50,000 worth of items that cannot be returned, and the balance did not exist.  This was the result of poor record-keeping.

The practical consequences of this discrepancy were: Profit had been inflated; income taxes had been overpaid; cash management had struggled; business value was less than the owner expected.

Inventory management is one of the most important operational requirements of ownership.  It impacts cash flow and profitability every day.  Not tending to this key metric would be similar to not tending to your bank account.

Take a peek at your fixed assets and inventory “on-hand” versus the values found on your financial statement…. Do you need to make some adjustments?

Learn more about making your enterprise a healthy, Perpetual Business: https://perpetualbusiness.co/