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Financial Report

What is Financial Reporting?

In just about any industry, financial reporting will be crucial. This is the disclosure of the business’s finances and related information and is usually given to management as well as stakeholders. The financial reporting covers how the business is performing, usually on a quarterly or annual basis. There is certain information that needs to be included in the financial reporting and various guidelines that should be followed when creating the report.

Why is Financial Reporting Important?

Financial reporting is required by just about every stakeholder, and there are multiple reasons why they might need it. Some of the reasons it may be important will include the following.

  • Required by regulations – Local regulations and statues may require companies to provide financial reporting on an annual or quarterly basis. In these cases, the financial reporting will need to be published so anyone can read it.
  • Helps During Audits – When the finances of a business need to be audited, a financial report is required. This allows the auditors to get a clear overview of the business’s finances. They may need to access prior financial reports, not just the most current one.
  • Assists with Financial Planning – The financial report provides an overview of the company’s finances that can be useful when making decisions. It can also show a clear pattern based on changes made when the past few financial reports are compared together.

Business Building

  • Used to Raise Capital – Businesses that need a loan or to raise capital via investors will need to provide the investors or the bank with their financial reports. This allows potential lenders or investors to do their due diligence before giving the company money.

What to Include in a Financial Report

A financial report is typically a very long document that includes a variety of information about the company’s finances. There are certain parts of the financial document that must be included, though other documents can be included as well. Some of the crucial documents to include are the following.

  • Statement of Financial Position – This part is an overview of the company’s finances at the end of the quarter or the year. It includes assets, liabilities, equity, and more.
  • Profit and Loss Report – This is a more detailed part that covers the income, expenses, and profits or losses for the period of time covered in the financial report. This should include any sales or expenses during that period of time.
  • Changes in Equity – This part covers the changes in equity for the company during the financial reporting time period. Any changes in equity need to be in this section.
  • Cash Flow Statement – This is a report covering where the money came from and went during the quarter or year. More detailed than the profits and loss report, this covers investments by the business, sources of cash, and any other ways money was brought into the business or used by the business.

Objectives of Financial Reporting

When creating a financial report, it’s a good idea to keep the objectives of the report in mind. It should be organized, so anyone who needs to view it can find the information they need quickly and easily. The following objectives should be considered when creating every financial report.

Stakeholders next to a financial report

  • Provide Management with Financial Information – Management for the company will use the financial report to plan, analyze previous changes made, and make decisions for going forward. They will need to be able to see an overview of the finances with respect to the decisions they’ll be making.
  • Provide Investors or Creditors with Financial Information – Any investors or creditors will want to review the financial reporting to ensure the business is still bringing in profits and able to meet any obligations. They may also review prior financial reports before offering financing to the business to ensure they will receive their money back.
  • Provide Stakeholders with Information – Stakeholders will want to make sure the business is operating as intended and that there are no major issues they should be aware of. Much of the information they’ll want to review is covered in the financial report.
  • Provide Auditors with Information – When the business needs to be audited, the financial report should assist the auditors in finding the information they need. This can help the audit proceed faster and minimize the potential for any issues.

Across industries, businesses need to make sure they create financial reports on a regular basis. These reports are used in a variety of ways, so it is critical they include everything that might be needed by the people who use it. This way, the financial report can become an asset the company can use for management, lenders, governmental regulations, and more to show how the company is doing throughout the quarter or year.

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Why Business Owners Sell Their Business

As an entrepreneur, the penultimate day of your life is the day you hand over your baby to someone else. Baby being your own business that you’ve built from the ground up. Making the decision to sell a business you’ve invested so many years of blood, sweat & tears into is incredibly difficult.
Depending on the circumstances, it can be either a deeply positive or a deeply negative experience – but it’s almost ALWAYS an emotional, and bittersweet event. There’s a ton of different reasons why business owners decide to take the leap – let’s talk about a few of them.

Personal Reasons

First and foremost, most business owners do part ways with their own venture purely due to personal reasons. Why? Cause as it’s usually said, running your own show is a 24/7 job and this can get exhausting pretty fast. Other times, it can be a purely be a shift in interest, or that they are hitting retirement. There are many reasons but here are the key ones:

1. Burned out or health problems

Nothing is more demanding than running your own business and this can sometimes either lead to owners burning out or experiencing health issues. In either case, running a business demands a lot of time and effort from its owner and the workload only keeps growing as the business grows in size. When the pressure becomes too much to bear, the owner usually decides to sell the company.

Building on this, owners can also sometimes fall ill, either by way of burnout or just bad luck. In such a case, some businesses are heavily reliant on the owner for its day-to-day operations and if the owner is suffering from health issues and physically not able to run the business. It may be the best option to sell the business in order to keep the business alive.

2. A shift in interests or priorities

We’re all human and we get bored easily, even when it comes to running a business. Especially with owners who may be serial entrepreneurs, once they’ve built a business and successfully got it to steady state, they may get bored and would like to pursue the next business idea in their head. We only have 24 hours a day and this means owners might sometimes fully cash out by selling their business to fund a new one or take a step back from direct ownership, still retaining equity but no longer involved in the day to day operations of the company.

Similarly, we all get old and the time comes when we need to hand over the keys to the kingdom. One of the most common reasons business owners sell their businesses is retirement. Although running a business has its own rewards, doing so for a long time can be exhausting! In such cases it’s normal for owners to feel that the benefits of selling the business far outweigh those of maintaining ownership.

Financial Reasons

methods of company valuationIf personally everything is going great. Sometimes, the reason for selling a business is purely financial, either to cash out and go live in the bahamas for a few years, or to capitalize on a inflated market value, or purely hedge your bets against an economic downturn. Whatever it is, here are the most common financial reasons we’ve seen for owners selling their business:

 

1. Liquidity

Although many business owners have a high net worth for their years of toil and growing their business. A considerable amount of this value is often tied up in the business as equity, and therefore, illiquid. Business owners may decide it’s time to reap some of the rewards and sell all or some their equity to convert it to cash.

In the cases where they only sell some of their equity, this is known as recapitalization. It’s a process where the exiting owner retains a minority equity stake — normally in the range of 10 to 40 percent. Usually, this is done by owners to reduce risk exposure by selling their equity to free up some cash but still retain the benefits of ownership. Generally in this case, you’ll see the exiting owner’s role slowly diminish, allowing them to almost act as advisors to the business but gain more freedom with their time to pursue other interests.

2. Macro Environment factors

Sometimes the industry of an owner’s business is suddenly gaining a lot of interest from outside investors (e.g. Artificial Intelligence right now), this vast pool of capital pushes up acquisition prices. Some owners decide to take advantage of the upswing in value and sell their businesses off at a higher than normal price.

economy businessesSometimes, the revenues of a business can decline for macro factors reasons far beyond the owner’s control — like an economic downturn or a high unemployment rate. Some business owners may choose to wait out such changes, but others can’t or don’t want to. In such scenarios, if the owner doesn’t want to wait till things get better, selling the business becomes the most viable option.

If business owners feel that their industry may go through some changes in the future that can affect their businesses negatively, some owners may be risk-averse and decide to sell sooner rather than wait an economic downturn that devalues their organization or impacts future profitability of the business.

Strategic Reasons

Sometimes, the reason for selling a company can be strategic or operational. An owner may decide to sell the company for the following strategic reasons:

Finance an expansion

If a company lacks the cash to buy new equipment, hire new employees, and increase advertising to broader its operational footprint, the owner may decide to sell some stake to an entity that can bring in the cash required for the expansion.

Raise capital for an acquisition

A company can benefit from being acquired by an entity that has the capital or debt capacity to consolidate the industry by acquiring a series of smaller competitors. In this scenario, the company improves its profitability by operating in an industry with fewer competitors. Moreover, it gets access to its former competitors’ resources like management talent, patents, etc.

Improve your competitive position in the market

Improve market share

A company being acquired by another one help it improve its market share by allowing it to leverage the larger acquiring company’s distribution and marketing channels, as well as the brand equity and goodwill.

Diversify customer base

Most small companies depend on a single or a relatively small number of customers to generate a large percentage of their revenue. This kind of customer concentration increases enterprise risk as losing even one or several key customers may cause the business to go bankrupt. In such cases a company can significantly lower the volatility of its cash flow by gaining access to the acquirers diversified customer base.

Diversify product and service offerings

A company may also look to be acquired so it can leverage the addition of the other company’s product and service offerings to its portfolio. The company can use the improved product and service portfolio to increase its customer base and revenue.

Import better management

man with business suitA company may seek acquisition by another company that has superior management practices. This strategic move can help to unlock value in the for the acquired business. The acquired business can benefit from the better, more professionally managed IT systems, equipment maintenance, accounting controls, executive leadership, etc.

Leadership succession

Sometimes business owners have to sell their businesses due to poor succession planning. If a business owner doesn’t have a worthy successor, selling the business allows it to continue operating effectively instead of closing its doors or risk declining business performance.

Conclusion

Ultimately, every decision to sell a business is based on various circumstances. Regardless of the reason to sell, it’s important for a business to be professionally appraised by an independent valuation firm so that it’s sold at a fair price, under fair terms, and in the owner’s best interest.

how to protect your company against shady investors

How to Prevent a Shady Investor From Damaging Your Business

The vast majority of organizations require investors to obtain the capital needed to start a new business or expand an existing one. While a specific investor may have the best interests of the company in mind, that’s not always the case. There have been numerous instances where an individual Investor has undermined the company for personal gain rather than contributing to the organization’s growth and long-term success. Before entering into any relationship with an investor, it pays to consider whether that individual is a good fit for the organization seeking funds. Also interesting: using a dataroom for due diligence or M&A transactions.

Why Are Shady Investors Dangerous for Your Business?

Virtually every business exploring new funding sources has long-term goals that may, at times, impact bottom line figures in the near future. Investors should be well aware of the company’s short- and long-term objectives when investing capital. That means they’re willing to forgo significant immediate gains in favor of larger long-term profits. A Shady Investor, on the other hand, will generally act as though they understand the plan but change their attitude significantly once their money has been accepted.

The less-than-optimal Investor will then attempt to alter the strategies employed by the company to enjoy a greater profit sooner. If they have a contractual ability to impact the organization’s business plan, that can quickly lead to problems with company personnel as well as other investors. The net result can, and often is, a failure to achieve the necessary results sought by the company. The question then becomes, what steps can an organization take to protect themselves from a Dangerous Investor?

Safeguard Your Company’s Future

shady investor protectionThe concept of Due Diligence has been around for a long time, but today’s organizations are quickly finding the actual process is evolving. An Investor may be sought out by the organization or may take the initiative and approach a business. Before getting involved with any potential Investor, an organization is always encouraged to look carefully at the potential investor to prevent issues from developing.

  • Investors must understand and accept the company’s culture. An investor who doesn’t is likely to create strife from day one, which is certainly counterproductive. That means company representatives must review the organization’s structure and business strategies with a potential funder prior to accepting their capital. If the fit between the potential Investor and the organization appears appropriate, that’s one less thing to worry about.
  • Don’t neglect to explore the potential funder’s past history as part of the due diligence. While an investor may appear to be a good fit, the individual may not, in reality, have the company’s best interests at heart. Generally, it’s relatively easy to discover how the investor has handled any previous similar relationships. If there is a history of the individual demanding a company change their strategy in the past, there is a strong likelihood it could happen again. It’s best to avoid investors with this type of history or a history that’s not transparent.
  • Avoid diluting a company’s control. As a rule, no single outside investor should be able to acquire over 25 percent of the company in exchange for their investment. In the event the control is diluted too much, the potential for a takeover is simply too great. Even when a relationship with an Investor starts out on a stable footing, things can change. To avoid issues, make sure the existing company owners always retain control.

Of course, there are other due diligence strategies to follow and, as noted, they are evolving rapidly. All companies are routinely encouraged by experts to examine their current practices and take advantage of opportunities to improve those practices.

Investor input can be beneficial for companies, but that input must be limited. That suggests it’s always important to understand exactly who is investing and what their long-term objectives are. If an investor’s objectives actually align with the organization’s, the relationship will benefit both.