Maintaining business records is not exactly fun. It’s often the part of running a business most people don’t want to do. Who wants to sit around crunching numbers all day?
However, if you don’t do this, and if you don’t do it well, your business will suffer. In fact, the top reason new businesses fail is that they don’t manage their cash flow well enough.
But keeping good records has more significance than just keeping your business alive. It also helps to increase the value of your business. But first:
Why does business value matter?
Now, you might be asking: why do I need to make my business valuable? Well, there are two reasons. First, when you look at what makes a business valuable, you’ll quickly see that a valuable business is usually a good business to own. It’s profitable, efficient and sustainable. The things business brokers look for are often what we want from our businesses anyway.
Second, there may come a time when you want to sell your business. When this happens, you want your business to be worth as much as possible. It might be hard to consider selling your business now, but there are many reasons why this might happen. For example:
- there may be other projects you’d like to spend more time on
- things in life may have changed and you can no longer pay attention to the businesses
- someone has made you an offer too good to refuse. Overall business transactions are on the rise, meaning there’s some serious money to be made if you take the right steps to boost business value.
Whether you’re planning to sell or not, the best thing you can do for your business is to begin preparing is if you are. This will help improve the way you do things, and it will also make sure you are in the best position possible in case of an unexpected sale.
We’re going to review some of the ways records keeping affects the value of your business so that you can implement some best practices into your business and increase its worth.
You can make your business more profitable
While increasing sales and limiting expenses is key to profitability, there are other ways to increase your cash flow. Keeping accurate, quality records is one of them. For example, if you use lots of contractors or freelancers, accurately tracking time is very important.
Instead of relying on these individuals to be 100 percent accurate, consider using time tracking software. This will make sure you’re only paying for the work you’re receiving. Most freelancers won’t intentionally try to trick you. But no one is perfect, so get some help to try and make sure that your records are.
You’ll also want to consider going digital for other aspects of your business’ accounting. By making use of modern technology to create and track invoices, you can be sure you are charging exactly what you deserve. Often, we’ll say things such as, “It’s only ten minutes.” Once in a while, this doesn’t matter. But it adds up over time and hurts the health of your business.
You can get help with resource allocation
As we mentioned earlier, improper cash flow management is a big reason why businesses fail. And one of the reasons for this is because it prevents them from efficiently and effectively allocating resources.
This is one of the biggest challenges of running a business. Knowing where to invest money and when to save can be very difficult. And this is especially true when you are trying really hard to grow.
If you don’t keep good records, it’s very easy to end up over your head. You may find yourself pursuing a growth area with not enough cash to do it correctly. And far too often businesses find this out when it’s too late. Their response is often to go further into debt, and this is not good for anyone.
But keeping track of cash and investments will pay off in the future, too. It will give you the chance to look back at what you’ve done and decide if your efforts were worth what you spent.
For example, imagine you spent money on a social media marketing campaign. If you have good data about what you invested and what the return was, you’ll be able to do a better job the next time you run a similar campaign.
This is also helpful to investors. They will be able to see what has worked and what has not. From there, they will be able to see a path forward for the company. When they know where they are heading, they are more likely to make an offer. And it’s more likely that offer will reflect the true value of the business.
You make it easier for investors
It’s all about the customer. This is true in sales of any kind, so it makes sense that it’s also true for the sale of your business. But this time, your customers are potential investors.
So, to successfully sell your business, it’s important to make sure your “customers” are as happy as they can be. Accurate records and data do just that. Providing verifiable numbers to any interested parties will give a clear snapshot of the business; it will allow investors to see right away if the business is successful, and it will also show them how they might be able to make it more successful.
Having good records also makes it easier for you to impress your potential investors. When you prepare for the sale, you’ll need to create an executive summary. This is a short document that quickly outlines the most attractive parts of your company. It’s often what convinces people to continue looking into your business.
If you don’t have good records, it will be difficult for you to create a convincing and engaging executive summary. And this will show.
Keeping good data on your company will make it easy for you to summarize to someone how you are doing. And it will also make it easier for investors to see where you got these numbers. They will inevitably want to check for themselves, and the easier you make this for them, the better the offers you will receive.
This is also good practice for you. Making sure you always have a clear idea of your business’ current health will first give you peace of mind, but it will also allow you to make better decisions. Using data is always the preferred method, so do your part to make sure you have that data.
You can show a path forward
When deciding whether to buy a business, investors want to know where it’s going. Accurate business records will clarify this for them. But this involves more than just financials.
For example, keep track of business relationships. If you’ve had success with outside firms, keep their contact information. Or if you’ve worked with contractors, make sure you have evidence of their work and how it supported the business.
If investors ask you about some aspect of your business, and you reply, “some guy did that for us,” they’re not going to get too excited. Instead, reply with a direct contact. This makes it much easier for investors to continue and expand upon what you’ve already done using their fresh ideas and resources.
You’ll also want to keep track of any and all market research you have. Investors will know about the overall climate of your industry, but they won’t know yours. Hopefully, you have conducted surveys or focus groups at some point. Keep all of this data and present it to investors when they approach you. This will give them a good idea as to what they are about to take over. And this is very helpful for making a favorable impression. Having all of this information close at hand will also facilitate day-to-day decision making with the business.
You can prove you’re following the rules
Nobody wants to buy a business if it’s in trouble with the law. There are many different regulations companies have to follow, and the government will fine you if you don’t follow them. They can even shut you down if you’re really breaking the law.
This is one of the first things a potential investor will look at. If they sense any trouble, they will immediately run away. The best way to prevent this from happening is to keep good records.
Make sure you have proof that you’ve paid all your taxes. When you take deductions, keep your receipts. Also, make sure these are easy to access and read. Investors will appreciate it. This should really be a formality in the sales process. Keeping good records makes sure that it actually is.
But taxes aren’t all you need to keep track of. In some states, you need to provide health insurance to employees. Make sure you have proof of this. If you deal with any hazardous waste or other environmental materials, make sure licenses and certifications are all updated and documented. Also, keep files of employees’ work permissions. They need to prove that they can work, and you need to prove that you checked.
In general, if there’s a doubt, keep track. Any small reason for holding onto something is sufficient. It’s better to have something you don’t need than to not have something you do need. Plus, full transparency really helps investors. It shows you’re serious and ready to do business.
As you can see, how you approach record-keeping in your business has a huge impact on its value. But it’s also clear that it can affect the way your business runs now. It can clarify your cash flow and help you make better decisions, not to mention that it can help make you more profitable. So whether or not you’re planning to sell, start looking at your records keeping practices now. There’s nothing to lose and everything to gain.
About the author: Jock is the founder of Digital Exits. He specializes in the buying/selling and appraisal of online businesses. He has bought, built and sold several online companies throughout his career. He started his first one when he was just 19. Now, when he begins working with a client, he first asks for financials. He writes frequently about his experiences. You can find some of his work in publications such as Forbes, Entrepreneur, Business Insider and CNBC.