After being a Part time CFO for over 4 years now, I am seeing a trend that is not good and not productive for the business owner. The alarming trend is there are too many business owners who have inaccurate financial statements.
Many business owners want to know two things no matter how interested they are in financial information. That is they want to know what their sales are and they want to know what their net profit is. Even the most uninterested business owners in financial information want to know those two metrics. However, if the financial statements are not accurate you will not know those two metrics or if you do know those two pieces of information they will not be accurate.
Why does the business owner need accurate financial Statements?
To make better business decisions – How can you make business decisions on Collections, pricing, what vendors to pay, capital expenditures, inventory purchases and much more without accurate financial statements?
To get bank financing and to obtain leases – Banks will take you a lot more seriously if your financial statements can back up what you tell them. Furthermore when a banker sees inaccurate financial statements (and many financial types can usually tell inaccurate financial statements merely through looking at them) there is very little chance to get a loan.
To Keep Bank Financing - Many business owners have credit lines that need to be extended or converted to term debt. Without accurate financial statements, at the very best case you are going to make your banker nervous not to mention you may not get the credit line extended which requires you to payoff the credit line immediately.
Allows for better financial analysis – Without accurate financial statements there is no basis for solving problems or for strategic planning. For example without accurate financial statements you cannot solve cash flow problems nor do a business and cash flow forecast. You cannot determine with certainty whether a change in business model is going to work for you.
Estate Planning – If you are going to have an effective estate plan the accuracy of your financial statements are a critical part of the process.
Selling a business – The amount of earnings that a business has is critical to its valuation. Inaccurate financial statements will be discovered by the buyer during the due diligence process and your deal could be in jeopardy.
Shareholder Buyout or Disputes – Just like selling a business accurate financial statements are critical in any shareholder buyout or dispute. Similarly the following events also require accurate financial statements:
Employee Stock Ownership Plans
Litigation or Divorces
Shareholder Buy and Sell Agreements
A Part time CFO can be a very cost effective way to make your financial statements accurate and alleviate any problems you may have with any of the aforementioned events.