Every business has a life cycle that begins with the birth, then transitions to the survival, growth and ultimately the exit stages—whether planned or not. Good clean financials are critical no matter what part of the life cycle you find your business in.
The birth, or start-up, stage requires you to take your vision and put it in the form of a business plan—a blueprint, if you will. Revenues of the business are the gas, and expenses are the brakes. Unless you have a clear understanding of both, you and your business may not end up where you planned.
Creating pro forma financials—fancy, Latin words—is a means of calculating financial results based on certain assumptions and projections for some point in the future. Whether you raise capital from private investors or receive a loan from a bank, investors will want to understand their return on investment and the bank will want to know they will get repaid. We find that owners who skip pro formas when starting a business do not run their businesses as efficiently or profitably as ones who take the time for this process.
Now that your business is an ongoing concern and you’re out of the birth phase and on to the survival stage, creating your budget forecast from year one on and utilizing the pro forma data as the starting point will help you reach the growth stage of the life cycle. Running your business without a budget/forecasting model is like driving through the rain without windshield wipers: You cannot see.
Receiving budgeted versus actual financials each month as part of a financial dashboard—customized on the metrics you want to see—enables you to be nimble and make decisions based on facts, not conjecture. You’ll need to review hiring, marketing, payroll, payroll taxes, medical insurance premiums, cybersecurity, IT, gross revenues, profit, margin and a host of other data points.
It’s critical that the business owner knows where they are versus where they expected to be. Remember the bank that loaned you money or the private investor who gave you capital? The bank will want to see your annual financials including P&Ls and balance sheets to ensure you’re not in jeopardy of breaking any covenants. Your private investor will want to see how their investment is progressing.
You’re now in the growth stage of the business life cycle, and the business is humming along. Suddenly, a shock occurs—something completely out of your control happens such as a major recession or loss of a big client. By definition, shocks are unexpected. You better know your numbers because while revenues decline, your vendors and employees will still demand their payments. Expect your bank to call and investors to ask questions during economic setbacks.
For a business owner who has great financials including their budget/forecast, monthly P&Ls, cash flow statement and balance sheet, we find that while we can never control what may happen, generally they have already anticipated what and how they would go about making changes to weather a storm. Having your tax CPA and outsourced accounting together on one team can save time and money, improve financial security in an age of intense cyber-sensitivity and provide an advantage by identifying tax-saving opportunities.
Finally, you ponder the exit stage, and this can mean a lot of things depending on your goals. It could mean you want to prepare your company for sale, transition the business to certain employees or a family member, or run it until you drop. No matter your goal, business transition planning should begin sooner rather than later—as none of us can control what life throws at us or when opportunities may present themselves. Being prepared is key.
If you’re even thinking about selling your business, know that every buyer will go through an extremely rigorous financial due diligence. Your financials better be clean if you want to receive the money indicated on the letter of intent that was just handed to you. Expect the buyer to drill down into your past three to five years of financials, including tax returns, looking for any irregularities.
If your financials are in disarray, our experience is that you will not receive top dollar for your business, and the due diligence process will be long and hard. Just as a house sells better with fresh paint and new carpet, a business sells better with clean financials. Hence, this is a process you want to start sooner rather than later.
The bottom line: Start with a good outsourced accounting and tax team from the very beginning. It will make running and growing your business so much easier, more enjoyable and more profitable with good books and records. Your bank, investors and—most of all—you will be happy you did.
If you believe you have that covered, great! If not, you may want to consider outsourced accounting, which gives you your own financial accounting team without the burden of having more employees—and leverages your business resources toward areas that most need it.
As a multifamily office serving families and families that own a business, Running Point’s dedicated outsourced accounting team and tax professionals can help you customize your monthly financial dashboard and proactively look for tax and estate tax opportunities, allowing you to devote more time and resources on running and growing your business. Whatever your goals, we have the experience to help prepare you and give you peace of mind. One team, all of your key professional advisors under one roof—serving you.
Tina Conaway & Jim Schlager
Disclosure: The opinions expressed herein are those of Running Point Capital Advisors, LLC (“Running Point”) and are subject to change without notice. Running Point reserves the right to modify its current investment strategies and techniques based on changing market dynamics or client needs. This should not be considered investment advice or an offer to sell any product. Running Point is an independent investment adviser registered under the Investment Advisers Act of 1940, as amended. Registration does not imply a certain level of skill or training. More information about Running Point, including our investment strategies, fees, and objectives can be found in our ADV Part 2, which is available upon request. RP-21-11.