Quality of Financial Statements

We 're selling the firm .

Owner wishes to

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W-MOSZCZYNSKI-2020-10-14

For most business owners, the quality of their financial statements is not a priority. The accounting department is not the place where the company presidents feel the best. It doesn't matter the quality of their financial statements, it's important that the office doesn't get carried away. Of course, the owners are well aware of the value added tax and the gross financial result.

But the presidents usually avoid looking at the financial pots of the accounting firm, and the accounting firm doesn't like people walking around their backyard, so they keep a safe distance from each other.

On the other hand, if an owner wants to sell a business, he must be interested in the quality of the financial statements, as they are the primary source of knowledge for a potential buyer. Their quality depends on the due diligence process and, consequently, the final sale price of the business.

Every beginner manager's guide says that in management, you don't have to limit yourself to results, you have to get inside the processes, so you have to take a deep breath and look into the accounting pot.

Anybody who wants to sell their company should know that investor analysts will undoubtedly go to the accounting department first.

How do you evaluate the quality of your financial statements without completely knowing how to do the bookkeeping? Do you listen to the engine in your car and you hear that we have a failure? Everyone can hear that! And not everyone knows how to build an engine! The same goes for evaluating your financial statements.

If the individual costs for the next few months differ significantly, jump or are not related to the income earned, then we have a problem.

Jumping costs means that the accountant does not read contracts or do not apply interim settlements. If an incredible profit occurs in a typical stable business and a large loss occurs the following month, it may mean that the accountant does not make any reservations for no cost invoices or does not settle costs on time.

In other words does not apply the principle of cost-revenue ratios. Poor accounting is like a red light for investors. If the financial statements are wrong, the information contained in them is false. Financial statements can be wrong even though they meet legal requirements.

The tax is included in the incremental scheme, whereas the activity is assessed on weekly basis,

If the owner doesn't know what's going on in his company, it means that the company is running badly. The price of selling the company is falling because there's increasing investor uncertainty.

An owner who wants to sell his business should also look at inventory rotation, and you don't have to be an accountant to know that materials, semi-finished products, and especially goods and products, should rotate, and so should the debt and liability rotation.

It may turn out that no one is running a rotation, that there are goods in stock, that there are outstanding debts in the accounts, that on the balance sheet you can see working capital frozen in the goods and materials, that the accounting obligation is to follow the golden rule of the balance sheet, and that the quality of the financial statements is also known.

It's also a good idea to check if the accounting firm has a systematic inventory of cash and inventory, and you don't have to be an accounting expert to find negligence.

The last dead body in the closet that an owner who wants to sell a business can find in the accounting department is backlogged, unresolved, endless litigation and court cases, and this time it's not about the quality of the financial statements, it's about the things that are most often used to devalue the company in the final negotiations.

We're only going to get information about these cases in the accounting department, and the owner who wants to sell the business should close those cases at all costs before the first buyer hits the door.

I've shown you how to evaluate the quality of your financial statements, and I've shown you how to evaluate the quality of your financial statements, but nothing will replace the balance sheet analysis done by experienced auditors.

It is good practice to point out that we are not only concerned with compliance with the law, but also with assessing whether the accounting process is consistent with good practice.

An owner wishing to sell a business should ensure the quality of the financial statements, as this will allow him to receive a high price for his business.

Wojciech Moszczyński — graduate of the Department of Econometrics and Statistics of Nicolaus Copernicus University in Toruń; specialist in econometrics, finance, data science, and management accounting. He specializes in the optimization of production and logistics processes. He conducts research in the area of the development and application of artificial intelligence. For years he has been engaged in the popularization of machine learning and data science in business environments.