Posted on Sat, Oct 10, 2009
Manage the Income Statement
As a small business owner, when you hear “manage the income statement” your thoughts most likely jump immediately to thinking about strategies to minimize tax impact.
However if you are considering selling a business in Tucson or Southern Arizona, tax deferral is no longer your objective. It is time now to shift gears and begin to examine the income statement from the perspective of someone who may be preparing to buy a business in Tucson or Southern Arizona.
Buyers like to see consistent revenue growth and consistent operational expenses. Revenues, or expense categories, that visibly fluctuate up and down on your income statement from year to year will immediately invite questions. When the option exists, these fluctuations on the income statement may be balanced out by increasing or decreasing revenues, giving or postponing bonuses or capitalizing or expensing certain. Just remember that any such changes made to smooth out the income statement still need to be according to Generally Accepted Accounting Principals.
Taking personal discretionary expenses results in a lower net profit and less taxes. But just remember that for every $1.00 spent, the sales price may be reduced from $3 to $5 or more. Keep receipts for all discretionary expenses in separate folders so that you have proof of these expenses to show to a buyer.
A business broker can explain the process of “recasting” your Income Statement to better determine the profitability of your business and thus the likely pricing range it will fall into in the market. How you have managed your income statement will have an impact on what a buyer is willing to pay for your business.
If you'd like more information on this subject, please contact us at 520-327-4454 or visit us at www.allenandyoung.com
Posted on Sat, Oct 03, 2009
If you are considering selling a business in Tucson or Southern Arizona, or making a Tucson Business Investment, another critical aspect of your business that needs to be in order before you sell is your Income Statement.
Don’t wait until you are ready to sell, or need to sell, your business to invest the time and resources in ensuring that your income statement (and all of your accounting records) is thorough, accurate and consistent in the methods applied. If someone else, perhaps a book-keeper or CPA, has been doing your bookkeeping for you and you perhaps have only been reading top-line reports, you may not be aware of how entries are being booked.
Review the Income Statement and understand each of the entries. Dig in to the General Ledger to thoroughly understand what sub accounts and line items are being rolled up into each Income Statement Summary line, for both revenues and expenses.
Pay particular attention to what is included in the different expense accounts. Someone considering buying a business in Tucson or Southern Arizona, or making a Tucson Business Investment, will expect a detailed explanation of all expenses and will be looking for discretionary items that can be added back to income. Make sure you have recorded these, and kept back up receipts for spot check and cross reference during due diligence.
Make sure the Cost of Goods sold is accurate based upon accurate inventory amounts and purchase prices. If current prices of major inputs have changed since the time your raw material inventory was purchased, make sure to make a buyer aware of that and its materiality to the business.
We believe It can be well worth the expense to hire an outside bookkeeper or CPA to look over your bookkeeping processes and advise you on an changes in your procedures that may be advisable or necessary.
Again, don’t wait until you want or need to sell to commit to accurate accounting records. The Income Statement is the first place a buyer will go, and yours better be able to stand up to scrutiny during due diligence or you may lose the deal. Then, you’ll be hiring a forensic CPA to go back in time and clean things up. It is easier and more cost-effective to do things right the first time.
If you'd like more information on this subject, please contact us at 520-327-4454 or visit us at www.allenandyoung.com