BLOG: Readying The Books for a Capital Transaction

With more than a decade of experience as an accounting professional in both the public and private sector, Erika Paul is a Certified Public Accountant and VP of Finance & Accounting at Greater Sum Ventures. With a knack for details and an aptitude for organization, Erika oversees financial reporting, works to integrate new acquisitions into best practice systems, policies, and procedures, and coordinates with the team to make strategic business decisions.

In a recent interview, Erika discussed some of the common pitfalls that small business owners encounter when tracking finances and how to get the books ready for a capital transaction…

First, what kind of metrics should a small business owner be keeping track of?

Revenue (the top line) and EBITDA (the bottom line) are the two biggest indicators of business health. Is revenue growing month over month? Is that additional revenue flowing through to the bottom line, or are higher expenses fully offsetting that increase? Ideally, the more revenue the company is able to bring in, the more profit that falls to the bottom line.

Watching your headcount and payroll is important. It is often one of the biggest expenses to a growing company and is always a balancing act. It’s important to set yourself up with the right employees and headcount, both from a numbers and payroll perspective, so that you’re ready for growth. The trick is to not do that so fast that you overextend and burn cash down prematurely.

What are some common mistakes that small business owners make when they’re tracking their finances?

Inconsistency is the biggest mistake, and that can be caused by being too detailed or not detailed enough. You need a solid understanding of what goes where. It makes it really hard to have an understanding of things like where you’re trending, what you’re spending, and whether or not you use a consistent logic and rationale for what gets booked where and why.

Another big mistake would be not reconciling accounts. Reconciling accounts can sound tedious or scary, but if it’s in QuickBooks, it should be simple because everything is feeding over directly from the bank or credit card provider. It allows you to know (especially if you’re on a cash basis) that everything that happened is in the financials. It’s the same thing with a credit card: If you feed it through QuickBooks, all the expenses that hit that card are in the financials.

A lot of people also struggle with the balance sheet and will sometimes just focus on the P&L. I recommend reviewing the balance sheet monthly to make sure everything looks reasonable. Variance analysis is really helpful for this. Are the account balances fairly consistent month to month? If not, what drove that difference and is it reasonable?

If I’m a small business owner thinking of taking on investment, what can I do to get my books ready to share with others?

I don’t want to say the financials are a side effect, but if you’re correctly maintaining consistency, reconciling for complete verification, and not going crazy and adding hundreds of accounts, then capital partners are typically able to get a clear picture of how the business is performing. All of that together allows us to understand if the business is a good fit for our model and to put thought around what tools we can bring to the table to really help the business grow. If you’re getting ready for an investment, it’s just a matter of making sure everything is current and accurate.

When a company is acquired, how does its bookkeeping process change?

It’s a bigger shift for some companies than others, but it really just depends on the starting point. With an acquisition, we’re all striving for the same thing: positive growth on a portfolio-wide basis. One way we make sure everyone is on the same page is to have a standardized chart of accounts. This allows us to roll up all the financials together, which not only saves time, but provides a standard to compare and evaluate company performance. This way, we know that when we compare COGS to COGS, one account doesn’t have a payroll or hosting component we’re unaware of. I think this also helps give business owners clarity as to where the company is headed and to understand how their financials roll up into the holding company.

If you’re on a cash basis, we will also work through an analysis to determine how to implement accrual accounting. This will allow more strategic decision making and aligns with Generally Accepted Accounting Principles (GAAP), which is what we are ultimately audited against.