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 the air.

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 and value.

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) statement
2.Balance sheet
3.Cash flow projection

What is an income statement?
An income statement shows the bottom line, or the net profit, for the month.

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 report.

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 the budget.

Setting up an income statement this way helps owners see errors more easily.

How can an income statement shed light on errors?
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.

Once errors are corrected, a final report should be generated so the owner can drill down into the statement and spot more serious problems.

For example, an owner may have renegotiated an equipment lease to be more favorable. However, let’s say the accounts payable department missed the memo and is still paying the leasing company at the old rate. Seeing the comparison to the year previous would help to catch that error. This is a happy example, but there is the other end of the spectrum.

Suppose the taxes have gone up on the building, but the prepaid account is reflecting 1/12th of last year’s rate. When it comes time to pay the taxes, the account will be underfunded and cause a cash flow issue in the month the taxes are due. If the budget was prepared with the correct tax information, the error would pop out on the comparative income statement.

The goal is to catch mistakes, reduce adjustments, and make expenses as predictable as possible. Having extreme peaks and valleys makes it harder for an owner to understand the true cost of doing business.


How promptly should an income statement be prepared?
Once accuracy has been achieved, the next step is to have the income statement prepared early in the month.
A draft copy should be ready within five to seven business days of the close of the previous month, usually no later than the 10th of the month. The draft should be very close to the final version for all fixed costs and sales figures.

What is a balance sheet?
If the income statement is a view of the past and a tool for spotting trends and problems, then the second financial report, the balance sheet, is a picture of the owner’s current financial situation.

The balance sheet shows the assets, both tangible and intangible, as being equal to the company’s liabilities plus the owner’s equity. Said another way, the owner’s equity equals assets minus liabilities.

What is a cash flow projection?
The third report is the cash flow projection or report, also known simply as the cash flow. If the income statement shows past performance and the balance sheet shows a current picture of the owner’s equity, then the cash flow sets the stage for how liquid the company will be at any point in the month.

The cash flow must be finished in a timely manner or it’s not useful. If payables are done on the 5th and the 20th of the month, for example, a cash flow should be prepared before the second payables are scheduled.

How is a cash flow projection used?
The owner needs to understand at what point in the month the company is ahead, behind or breaking even. If the break-even point is happening later and later each month, this is a negative trend that the cash flow projection will reveal.

If fixed costs are paid before the cash flow is generated, then the variable costs or negotiable expenses can be paid once the owner has an idea of the cash situation mid-month. A cash flow report will make it very clear if the cash has run out by the second payables date. Relying on the checking account balance for a snapshot of cash availability is not a good habit.

Why is cash flow so important?
It’s crucial to understand and control cash flow. Operating in a cash crisis mode leads to bad decisions and unfavorable terms when borrowing. Having access to cash at any point in your month will allow you to implement your strategic plan and jump on opportunities when they arise.

“Free flowing cash will help you generate new business,” says Patten. “It’s a major determiner of your success.”

What role do financials play in selling a company?
Plain and simple, having accurate and prompt financials makes a company more attractive to buyers. Like our example of  the difference between a tidy shop and the one that is unkempt, proper financials are a clue to the buyer of how the owner runs the company.

Second, clear and accurate financial records can improve your company valuation. Valuations provide a broad picture of what a company may garner in a sale. Within that range are influencers that can help an owner command a premium when selling his or her business. Evidence of successful financial management and planning are key indicators of current and future success.

Third, prospective owners want to see three years of financials. Banks demand three years of financials when lending or participating in a sale. An owner’s ability to sell or borrow is directly related to the quality of financials and how well the owner has interpreted that information.

When asked about the consequences of not having accurate and prompt financial information, Patten says it boils down to this: if you have bad financials, you’ll get less for your company. Period.

Think about how satisfying it is to have a shop that is clean, orderly and organized. Now think about how nice it would be to have financials that were the same way. The time is now to get your finances in order. It’s time well spent.



Rock LaManna, President and CEO of LaManna Alliance, helps printing owners and CEOs use their company financials to prioritize and choose the proper strategic path. He can be reached by email at [email protected].