As a business grows, accounting can become more complicated. Having more employees, fixed assets, and multiple locations all require increased accounting oversight and processes. Maintaining accurate financial bookkeeping does cost money up front in the form of software or a top-rated bookkeeper. Some businesses may be tempted to cut costs by avoiding this, however, setting up proper financial records will more than pay for itself in the long run. 

Establishing an up to date and accurate set of books has a plethora of benefits. It can be easier to identify fraud, provide peace of mind during an audit, help you make good management decisions, and assist when you need to obtain financing. Also, if you ever sell your business, you will need accurate financials to provide your buyer. 

There are countless reasons why it’s important to keep good records. Here are the four biggest reasons that a good set of financials is worth the upfront cost.

Reason #1: Fraud Prevention

Financial records that are not meticulously kept can lead to fraud within the company. Without the proper internal controls, employees can easily misuse your trust to steal company funds. Accounting records can easily be manipulated without raising any red flags, especially within small businesses. Since small businesses have fewer resources to devote to fraud prevention and often require an increased level of trust in employees, they tend to be more susceptible to fraud. According to the Association of Certified Fraud Examiners’ 2018 Report to the Nations, organizations with fewer than 100 employees experienced the greatest percentage of cases - 28 percent - in the study conducted by the ACFE. They also suffered the largest median loss - $200,000. (Compare that to employers with over 100 employees who lost a median of $104,000.) A whopping 42% of those fraud cases were caused by lack of internal controls.

Reason #2: Better Management Decisions

Business owners and key management staff cannot make effective decisions without accurate financial information. As a company looks at expansion and growth, it is important to consistently analyze its financials. This can help the company avoid making deals that may place itself in a negative or over leveraged position, and on the other hand potentially allow the company to take advantage of potentially profitable opportunities. By providing accurate and updated financial records, a business can make appropriate decisions to reduce costs, increase sales, raise profitability, and invest in capital assets. Financial statements are also invaluable in deciding when to hire more employees, as well as in determining what income level your business needs to support that extra staffing.

Reason #3: Obtaining Financing

As your business grows, so will the need for external funding sources. To expand your business, you may need financing to obtain more inventory, increase your space, or purchase new equipment. Whether you want to obtain financing through an investor, a commercial bank, or through an alternative avenue, every lender will request tax returns and interim financial statements. Being able to provide these with accuracy and timeliness may make all the difference in receiving your funding.

Reason #4: Selling Your Business

At some point, you may consider selling your business, whether to an outside company, a key employee, or someone else. After working for years to build your business, you’ll want to make sure to do everything that you can in order to maximize the value of the sale.

In public companies, any misstatement of financials can have a serious impact on share value. For example, due to an accounting error, Tesco inadvertently overstated its profit forecast, resulting in a share price drop of 11.6%. One study has also suggested that restatements of financials by public companies can destroy up to 35% of a company’s worth.

Without appropriate financial statements, it could be very difficult to sell the business to a prospective buyer. Buyers or potential investors cannot conduct the financial due diligence required to make their decision and may be forced to pass or delay. Without confidence in the accuracy of the financial statements, the seller is often forced to accept a lower offer in order to compensate the buyer for the risk. Closing of the actual deal will often be delayed as validating the accuracy of the financials can be extremely time consuming (not to mention costly).

If the financial records are incomplete or unreliable, the buyer will have less confidence in the seller and in the company. Because the value of a company is reliant upon the perceived future earnings capacity, unreliable historical data can make the future unpredictable, which can therefore decrease the value of the company.

Although experienced bookkeepers, accountants, and CPAs can be expensive, it’s best not to cut corners in this area of your business, especially if you are in the midst of high growth. Ensuring your books are up to date and accurate is one of the best decisions you can make for the future of your business.

Sara Maddox is an Enrolled Agent and Certified Valuation Analyst at CFO Consultants, LLC. CFO Consultants, LLC provides customized answers to the financial needs of small and midsize businesses in the Asheville area. They provide accounting services, tax planning and preparation, business valuation, and much more.