Imagine you are buying a business. You walk into the pressroom, and you see pandemonium. Discarded print runs are strewn across the floor. Ink is smeared on the edges of counters where people
lean. Power cords are stretched across walkways. Paper dust is thick in
Deal killer, right?
The same is true when buyers look at your company financials.
If your financial reports are inaccurate, disorganized or non-existent,
buyers will look, gasp and leave.
Whether you are planning to sell your business within the next
few years or merely want to enjoy running your business, getting a
handle on your finances will help you make decisions that affect profit
A person who understands the importance of an organized financial
picture is Bill Patten, president and broker of Sunbelt Business Brokers
in Vancouver, Washington.
Patten has over 30 years experience owning, selling, and managing large and small businesses in the fields of micrographics, printing,
document management and automation. Inc. Magazine listed one of
his companies among the 500 fastest growing privately held businesses
in the country. He earned his MBA from the University of Washington
Executive MBA School, and he is a licensed real estate broker in the
state of Oregon. As a Sunbelt professional, Patten works with owners
to prepare, market and package their businesses for sale.
Patten says almost every business can become more profitable with
the right financial reporting systems in place.
It’s a bold statement because many business owners have been taught
to associate profitability with the sales department, not the bookkeeping department.
WHERE DO OWNERS BEGIN WHEN
OVERHAULING THEIR FINANCES?
The bookkeeper, accountant or chief financial officer will prepare three
major reports for the owner each month:
1.Income statement, also known as the profit and loss (P&L)
3.Cash flow projection
WHAT IS AN INCOME STATEMENT?
An income statement shows the bottom line, or the net profit, for the
In simple terms, revenue minus expenses equals profit. It is calculated like this:
1.Gross Income (also known as revenue, income or sales) minus
Cost of Goods Sold (or the variable costs not related to overhead)
equals Gross Profit
2.Gross Profit minus Expenses equals Net Profit
3.Net Profit is usually reflected as a Percentage of Sales
If sales fluctuate or costs are highly variable, it’s important to watch
the net profit as it relates to cash flow. A high percentage of a small
amount is still a small amount.
Some owners think they don’t need an income statement. They
keep running tallies in their heads. They have a good idea of gross
sales for the month, and they’ve read the weekly reports from the sales
manager. Therefore, the income statement either confirms what they
have already been tabulating or it reminds them of unexpected expenses
or changes in overhead.
However, even if the owner has a pretty good idea of the financial
situation at any point in the month, it’s important to prepare a formal
HOW IS THE INCOME STATEMENT USED?
Although the statement looks at past performance, owners should look
for patterns and trends that can help predict costs and improve future
sales. It’s very easy to miss a downward trend if it is incremental. A
comparative income statement can help.
A comparative income statement compares each line item for the
current month to (1) the performance over the past three months, (2)
the same period a year ago, and ( 3) the corresponding line item on
Setting up an income statement this way helps owners see errors
HOW CAN AN INCOME STATEMENT SHED LIGHT
On the first read, owners should review the income statement immediately for obvious mistakes or red flags. Business decisions should
not be based on the preliminary report, however. Decisions based on
inaccurate or incomplete information are bad decisions, Patten says.
Clean up your finances and reap the