Inaccurate and incomplete

guest commentary by David Potts

Inaccurate and untimely bookkeeping and accounting hurts your business. It hurts your business in a myriad of ways. Yet many if not most main street businesses’ accounting records could be described as inaccurate or untimely or both.

By main street business I mean a small business, usually locally owned with one location, of average size. The owners don’t feel the business is big enough to employ an accountant or trained bookkeeper to keep the books. Usually the business owner or their spouse will buy a copy of Quickbooks and instantly, magically, overnight, become an “accountant.”

After all, according to the QuickBooks commercials, it’s that simple. Based on this belief they are now an accountant as well as an entrepreneur, and they chronically create inaccurate financial statements. Or there is the more diabolical side. In order to avoid paying income taxes the financial statements are purposely inaccurate.

The most obvious way bad bookkeeping hurts your business is by self-deception. For some reason the owner will print their Profit and Loss statement and actually believe what it says. Like the Powerball lottery, the numbers could be right … but probably not. And think, you are basing decisions that affect your livelihood with these financial statements.

I see this situation regularly in my capacity as a CPA. But in my capacity as a business appraiser and a business broker, I see these same businesses suffer bigger losses when they need their bigger gains the most. This is when the business owner needs to sell their business and has to rely on the proceeds from the sale of their business to supplement their retirement.

Inaccurate financial statements mean an inaccurate valuation of your business. Business valuations are based on your company’s financial records. The appraiser relies on the financial statements or tax returns you provide him. Remember he is an appraiser, not an auditor. He will in most cases accept at face value the information you give him. If your financial statements understate you profitability, your business valuation will be understated by a multiple of your misstatement. Methods used by business appraisers are based on multiples of earnings or cash flow. If your average earnings are understated $20,000, your business could possibly be undervalued $100,000. For most main street businesses, $100,000 isn’t petty cash.

On the flip side, an overstatement of earnings might actually hurt you more. This seems counter intuitive considering that an overstatement of earning would result in the appraiser overstating the value of your business. But an overstatement of earning can hurt in several ways. The most obvious “ouch” caused by overstating your net income is overpaying your income taxes. But you can at least justify to yourself that overpaying your income tax isn’t stupid, just patriotic.

The more serious damage caused by overstating your earnings and the related value of your business is when you have a possible buyer for your business and when this buyer performs his due diligence.

Due diligence is where the buyer investigates your business before the sale of the business is complete. It’s when the buyer kicks the tires and looks under the hood of your business. If during this period of due diligence the buyer finds something wrong in the presentation of your financial statements, he will begin to look at every representation you’ve made with more intense scrutiny. The more that is found misrepresented, the greater the mistrust the buyer will have in your other representations, even when they are correct and truthful. At this point the buyer generally revises his offer downward factoring in not only the expected reduction in value caused by the adjustment to the company’s profit, but an additional amount as a safety factor due to lack of trust in your presentations, all because you didn’t make the effort to produce an accurate set of books and financial statements.

Depending on how big a discrepancy was found, some buyers will walk away from the deal altogether.

So what is the value of a complete and accurate set of accounting records? Over the life of a business it could literally be hundreds of thousands of dollars caused by bad decisions, bad tax results, or bad valuation numbers.

The most successful businesses have accurate accounting records and financial statements and the owners have learned how to read and understand what the numbers mean.

How do you and your business compare? Maybe it’s time to increase the value of your business by calling a CPA. If the CPA is good he won’t cost you a dime. His fees will be a great investment because his recommendations will make you money.

About Potts
David Potts is a certified public accountant also accredited in business valuation. Owner of Potts & Company, Certified Public Accountants for more than 25 years, his practice focuses on small and medium size businesses and their owners in the areas of taxation, accounting and bookkeeping, business valuation and business advisory services. He is a Fort Smith native and a graduate of the University of Arkansas. You can follow more of his thoughts at ThePottsReport.com. Although every effort is made to provide you accurate and timely tax information, it is general in nature and not specific to your facts and circumstances. Consult a qualified tax professional to discuss your particular case.

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