You are looking to Start a Business. You are Running a Business. You are Buying a Business. You are Selling a Business. What is the most important step in any one of these ventures? And no, the answer is not having unlimited deep pockets.
To start, run, sell,or buy a business you need to understand that business. You need to understand not only the operational side of your business, you need to understand the financial side of your business.
I am a business broker in Florida and I help people buy and sell businesses. (and current and former business owner) This last week I completed a very busy week of helping an out of town business buyer visit several different businesses. Our intent of visiting these multiple businesses was an effort to understand the businesses. To buy a business you have to understand the business.
A small business owner truly needs to understand the financial health of their business. Many, many small business owners DO NOT understand the financial side of their business. Do you feel as an entrepreneur you need to understand the difference between a debit and credit or if you buy something if it should be a capital purchase or an operating expense?
So many small business owners and entrepreneurs run their business using their gut as their guide, they can feel if their business is going good or bad. Other small business owners look at their checkbook – if there is money in that things are ok.
On the other side you may have a very successful business, you buy several new truck and new equipment with cash every year, you have very little money in the checkbook and “feel” you have an unsuccessful business. You could be very wrong. And yes it is also very easy to hire a CPA and or accountant and send all the monthly records to them, count on them to sort thru them and have them generate a report for you to maybe glance at and file away.
Your CPA or accountant is a great place to start the learning process. The more you know, the more effective they can be to you. Your balance sheet and your Income statement tell your companies story. You may feel your company is healthy, or improving, or getting better, or getting worse – your balances sheet or Income statement (Profit/Loss Statement) will tell you in a factual manner.
You need money for your business – you go to a banker or financial institution to get money, do you think they will listen to you tell them about your business and loan you money based on that. they will use your company financials to make that business decision.
A few years ago banks I had worked with strongly considered your balances sheet to make loan decision. Now-a-days both Balance Sheets and income Statement both are a strong part of that evaluation. Why is that? Understanding the “whys” about your business is important to your business.
In the preceding scenario a business may have a strong balance sheet due to significant assets like real estate owned or equipment owned by the company. But in current economic conditions the companies Income statement show that the business sales are down 25% and and shows losses for the last year – lending may not occur. The banks may not be all that excited about the fact that you own real estate thru your company.
The business buyer I was working with flew in town for 3 days for him and I to visit businesses. Most of the small business owners we visited had good businesses. Without divulging any confidential information, they all showed cash flow in excess of $200,000 per year. They (the respective business owners) all said they didn’t really understand the financial side of the business, but “here our records for your review” (after confidentiality agreements were signed) They could speak for hours about their customers, employees, procedures and ideas. Questions regarding financial information were usually answered with 1 or 2 brief sentences.
The buyer I was working with was a very educated buyer, a President of a publicly held $40 Million company, and 30+ years of experience. He had looked thru maybe 30 businesses to narrow down visits to less than a handful. He and I both knew that to buy a business, he had to understand the business. We spent hours discussing the financials of the businesses.
You as an entrepreneur that is starting a business or running a business may someday want to sell your business. Understanding the true financial condition of your business is the 1st step to improving the financial condition of your business.
Buying a business is a very effective way to expand your customer base and Revenues. knowing how to read and understand the financial statements of others could be the difference of a business acquisition that is a success or a failure.
And when an educated buyer approaches you about buying your business, you provide the business buyer your Balance Sheet, your Income Statement, and your explanation and understanding of the true financial condition of your business may be the difference in someone buying your business at a good price or passing your business over to pursue other businesses to buy.