6 elements of a robust financial record keeping system

financial records keeping and business value

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This article was originally published on the 4th of December 2018

If someone asked you about your company’s Financial Performance, what would you say? This is one of the simplest questions, yet one of the most difficult to answer.

SME businesses often operate as if their sole purpose is to fund the owner’s lifestyle, but the most valuable run with the rigour of something larger.

Traditionally, businesses have produced annual accounts to sit in a secure vault gathering dust. In a modern business world, that is simply not good enough. You may be years from wanting to sell, formalising your records now will help you predict the future of your business. Questions around finance are ones we get asked a lot.

A healthy financial performance will drive the sale of your business. Being able to prove it is the tricky bit.

Looking for a handy checklist that will walk you through all that’s needed when preparing your business for sale? We’ve created one with all you need – and you can download it here.

What is a financial record keeping system?

Look at the world around you. We are an immediate society. We expect one click ordering, next day delivery and streaming services as a standard part of life. The majority of people utilise at least one of these things. The majority of business is done instantly on email, stock management is automated and even tax is now digital.

Financial record keeping is exactly what it says – a record of the financial transactions of a business. The system is your preferred method of keeping those records. Your system can make or break a business sale.

If your system is directly descended from Scrooge with paper ledgers, you will put people off buying business.

“No one works like that”, you say dismissively.

Perhaps not literally, but in our technological society, even a basic spreadsheet could be seen as archaic.

Don’t be caught out with the wrong type of record keeping!

The wrong type of record keeping

Your ‘System’ can loose your business sale

In business sales seeing things from the buyer’s perspective is very beneficial. For financial record keeping, it all comes down to trust.

Let’s suppose you’re buying a 2nd hand car. You ask to see the service history and you are presented with a neat folder full of every service receipt since new. You can see what repairs there were, servicing intervals, even replacement tyres. All in date order.

Does this show the current owner;

  • takes a methodical approach
  • is organised
  • that they don’t miss service interval dates
  • that the mileage is genuine, because you can trace it back
  • that they care about running a road worthy car

A trust in the information they provide gives you a higher degree of trust in the person.

Now consider a second sale. On asking to see the service history you are handed a few scraps of paper that show a couple of services but with a 2 year gap between.

For this owner you might think;

  • unprepared for sale
  • disorganised
  • unable to demonstrate a full history for the car

Your mind may begin to associate these traits to the vehicle itself.

  • has it been well looked after?
  • is it just missing paperwork or have services been missed too?
  • what might that have done to the life of some engine parts?
  • is something costly about to need a repair?
  • are they being truthful with me about everything?

A lack of trust in their information and a lack of care in presenting the car for sale may develop into a lack of trust for them personally.

If all other things were equal in the sale of these cars, which would you make an offer for?

You need defendable information.

What have 2nd hand car sales got to do with the sale of my business? It makes the point that to sell anything we go through the cycle to Know, Like and Trust a person.

The same aspects run through the mind of a buyer when they are assessing your business. Here is John Warrillow, creator of the Value Builder System with his explanation.

John and the data coming out from the Value Builder System show a clear correlation between someone trusting the numbers (how defendable they are) and an increased score. We know that an increased score across the 8 Value Builder drivers increases the price paid for a business by 71% (average).

Do I really need an audited accounts?

The simple answer to this is no, you do not need audited accounts unless legally required to do so. You do need to improve your record keeping system.

The sliding scale of trust for record keeping is;

  1. paper receipts and records (least trusted)
  2. automated accounting system with self input (e.g. Sage, Xero, Quickbooks)
  3. processed/prepared by a qualified bookkeeper
  4. processed/prepared by an accountant
  5. independently audited by a recognised accounting firm (most trusted)

You should be progressing your record keeping system up this scale.

paper financial record keeping

The importance of financial record keeping?

Historically reporting past business performance is necessary to demonstrate trends. How steadily the business is growing or shrinking. What profitability is being declared. What investment is being made in equipment or stock etc.

When John Warrillow talks about defending your numbers, it holds great importance.

Again, become a buyer for the moment. You’re looking to buy a business but notice a 10x increase in stock value over a 3 year period which is not reflected similarly in turnover or profit. You query with the business owner.

As the business owner you need to be able to clear this up quickly and with the clarity required by your buyer. There could be any number of reasons behind the change, the point is you have to defend your financial reporting.

If you take too long to answer or are unclear with your explanation, you begin to erode the trust your buyer has in your business. Just like the car sale referenced earlier, your buyer will look at the next business instead.

Using digital accounting systems like Sage also give you the opportunity to immediately update data throughout the year. As April is the financial year end for many businesses, by January, your annual accounts are reporting events that began almost 2 years prior.

Having the ability to run off Year To Date reports for numerous aspects of your financial records is invaluable during a business sale. They are also great management tools when it comes to strategic growth and direction setting.

robust financial record keeping

How long do you need to keep financial records?

For the UK the typical HMRC requirement is to keep financial records for 7 years. In their own words;

“You must keep records for 6 years from the end of the last company financial year they relate to.”

There are some exceptions which mean you need to retain records even longer. Check the Gov.uk website or clarify with your accountant.

In actual fact, for a buyer to assess your business, they will look only at the last 3-4 years performance. In addition it will help your sale enormously to produce 1-2 years cash flow forecasts looking ahead.

What is the Value Builder System?

The Value Builder System™ is a statistically proven methodology to improve the value of a privately held business. At its core is an algorithm that evaluates the 8 core value drivers acquirers take into consideration when buying companies. Useful if you want to sell now, in a few years or just to know that you’re building a valuable asset for the future.

After analyzing more than 52,000+ businesses, companies with a Value Builder Score of 90+ received offers that are 7.1 times higher than an average-scoring business.

Part of the first cohort of Certified Value Builders since 2014, Paul continues to help business owners through this program.

If you would like your first taste of what it covers, get your copy of the 8 Drivers of Business Value now.

Certified Value Builder logo

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