Key insights
- Financial health drives growth and reassures investors of your company’s value
- Getting your financial house in order starts with accurate and detailed statements and records
- External review can validate your financial strength
It’s 8 a.m. Do you know where your money is?
Solid business financial management is essential for business growth. By understanding your income and spending, you can determine what grows your revenue, iterate on successes, and make operational improvements.
Strong financials are especially important if you’re planning to sell your business in the next few years. Buyers scrutinize financials to assess performance, risk, and future potential—they want to ensure they’re making a wise investment.
This guide outlines a series of actions you can take to prepare your business for growth and eventual sale.
1. Prepare financials for business growth
Robust financial management bolsters sustainable scaling. When you chart revenue gains and understand your cash flow, you can plan for steady growth by pulling on the most effective levers.
How to ready your financials
- Develop a financial plan: Create a plan that includes budgets, forecasts, and financial goals.
- Monitor key performance indicators (KPIs): Track metrics like gross margin, net profit, and cash flow, plus any that are important for your industry and business model.
- Control costs: Regularly review expenses and identify areas for cost reduction.
- Manage cash flow: Ensure you have sufficient cash reserves to support operations and growth initiatives.
2. Clean up your financial statements
Ensure your statements are accurate, consistent, and professionally presented, because they’ll provide a truthful picture of your financial health.
Buyers will examine statements in detail once you reach the investment stage. Clean financials give them confidence and lead to a smoother, speedier due diligence process.
Key steps for improving statements
- Engage a professional: Hire a CPA or financial advisor to review and clean up your books.
- Reconcile accounts: Ensure all bank, credit card, and loan accounts are reconciled and any inconsistencies cleared up.
- Standardize entries: Use consistent, GAAP-compliant accounting methods across all periods.
- Separate personal finances from the business: Eliminate any personal expenses from company accounts.
- Document add-backs: Identify and document any non-recurring or discretionary expenses that can be added back to earnings before interest, taxes, depreciation, and amortization (EBITDA).
3. Organize your financial records
As with clean statements, well-organized financial records help track your company’s historical performance so you can forecast future growth. They also demonstrate professionalism and make it easier for buyers to assess your business, further expediting due diligence.
Tips for organizing business financials
- Digitize: Use up-to-date accounting software to keep digital copies of all financial documents.
- Implement an intuitive filing system: Organize documents by category (e.g., invoices, receipts, tax returns) and date.
- Regularly update and reconcile records: Ensure all financial records are current and accurately reflect transactions.
- Secure sensitive information: Protect confidential financial data with appropriate security measures.
4. Negotiate better supplier contracts
Optimizing supplier contracts can improve profit margins to speed your business’s growth. Buyers will also appreciate balanced supplier contracts and the operational efficiency they demonstrate.
How to renegotiate supplier contracts
- Review existing contracts: Identify terms that can be improved, such as pricing, payment provisions, and delivery schedules.
- Benchmark prices: Compare supplier prices with industry standards to identify possible leverage for negotiations.
- Consolidate purchases: Increase bargaining power by consolidating purchases with fewer suppliers.
- Build relationships: Develop strong relationships with suppliers to facilitate better negotiations.
5. Prepare for financial review before a sale
A third-party financial audit gives assurance that your financial statements are accurate.
Even more in-depth is a quality of earnings (Q of E) report, which Class VI recommends undergoing before selling your business. A clean Q of E can increase buyer confidence and potentially lead to a higher sale price.
How to prepare for the financial microscope
- Conduct internal audits: Regularly review financial statements for accuracy and compliance.
- Hire an external auditor: Engage a reputable firm to perform an independent audit.
- Maintain transparency: Be open and transparent with auditors and potential buyers about financial practices.
- Commission a Q of E review: The deliverables for this service contain much more detail about your financial situation and help buyers understand your business’s adjusted EBITDA, which is crucial for valuation.
- Address findings: Promptly resolve any issues identified during the various reviews.
Final thoughts
Healthy business financials are necessary whether you’re in a growth stage or prepping for an M&A transaction. You can enhance your business’s value and appeal to buyers by planning for growth, cleaning up financial statements, organizing records, optimizing supplier contracts, and preparing for external review.
Taking these steps facilitates a smooth sale process by positioning your business for continued success under new ownership. You’re in business to make money—manage your financials effectively to keep the revenue flowing!