Why clean financial records matter (and how to get them)
April 24, 2023 ⋅ 4 min read
If you’re thinking about getting a proper valuation on your business with Baton, you might be wondering, what’s next?
When it comes to valuing your business, clean financials are essential. Having accurate and up-to-date financial statements gives potential buyers a clear understanding of your business’s financial condition and helps them make an informed decision on whether they wish to pursue or pass. Clean financials are used to accurately assess the value of a business, and they are crucial when determining the asking price.
Buyers need to be able to analyze the finances of the business in order to determine how much they should offer. Having accurate and organized financials helps buyers to better understand the potential risks or opportunities associated with the purchase.
In order to provide an accurate valuation of a business, ideally, Baton looks for a minimum of 3 years worth of income statements/profit & loss (P&L) and balance sheets. Balance sheets will always assist the team you hire to do your valuation, but not necessary. On the other hand, income statements are required 100% of the time. With an income statement, we are able to see the following:
The money generated from business operations, also referred to as top-line revenue (due to its usual position at the top of an income statement).
Expenses a business incurs through business operations. For example, cost of goods sold (COGS), rent, payroll, marketing expenses, etc.
The earnings that a business takes home after all expenses are paid.
By giving our valuations team 3 years of historical data we’re able to understand year-over-year growth, quality of earnings, and other important business trends. For instance: Has your business seen a 20% increase year over year? Is your business seasonal or is there consistent income? Etc.
Just like real estate
Let’s think about this in traditional real estate terms.
You’re interested in selling your home, so you ask a local agent to swing by and give you their opinion of what your home may be worth. You walk them around the property. You make sure to point out the new roof, the detached garage, and the updated landscaping but when they ask to come inside you politely decline. There’s a 100% chance the agent is going to say there is no way for them to value the property without entering the house to see the bedroom and bath count, the size of the kitchen, the finishings and overall condition of the interiors.
Not only will an agent not be able to value your property, but no buyer would be interested in purchasing a home they’re not able to fully see until they’ve made the purchase.
The same goes for selling a business and valuing its worth.
Our job is to understand business trends through the company’s historical financial data (revenue and earnings) to determine value.
Clean financials are critical
Clean financials are critical when it comes to receiving a valuation and selling a business for several reasons. Firstly, accurate and organized financial records provide a clear and complete picture of a business's financial health, which is essential for potential buyers to evaluate the value of the business. Without clean financials, a business may be undervalued or overvalued, leading to a missed opportunity for the seller to get the best possible price for their business.
Clean financials can also make the selling process smoother and faster. A business with well-maintained financial records can quickly provide necessary information to potential buyers, resulting in a more efficient due diligence process. This, in turn, can help establish trust between the buyer and seller and result in a faster sale process.
In addition, maintaining accurate financial records is essential for internal decision-making purposes. It allows business owners to understand the financial health of their business, make informed decisions about the future, and identify areas that need improvement. This information can be used to make strategic decisions about the direction of the business, which can ultimately increase its value.
Need help cleaning up financials? You’re not alone.
Whether you’re looking to receive a valuation, sell your business, file taxes, etc. hiring a professional removes unnecessary time and energy. Focus on what you love to do in your business. Whether you have a budget of $300 or $30,000, Baton will match you with the perfect bookkeeper!
If you’re using a spreadsheet to track your financials, consider making a copy of our Business Financials for Owners template to track your financials effectively and accurately, and benefit from more efficient Baton valuations.