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If as a result of my business planning I was buying a business from someone who insisted that their business was a good buy but refused to hand over any financial statements or supporting information, I would run a mile.
It is always hard to know the reason for the reluctance but experience suggests it is either a rubbish business or else it could be this!
It is easy for owners in cash-based businesses to take cash from the cash register and never bank it or record it. Many owners confuse the concepts of revenue and profit. They believe that all money that is generated from sales is theirs.
Uhmm … no … big mistake!
There is that small matter of paying suppliers and all business overheads. What is then left over is available to be drawn by the owner and pocketed.
‘Living out of the cash register’ is a dangerous practice for the following reasons:
- It leads to cash flow problems because creditors can remain unpaid as a result of short-banked revenue
- If the pocketed cash is not accounted for as sales revenue and then as owner’s wages / drawings, there is going to be some false statements made on a tax return. Not declaring income taxable amounts to tax fraud. This will bring the ATO down on the owners head like a ton of bricks.
- When it comes to selling the business, the true value of the business can’t be substantiated because part of the sales revenue was pocketed instead of banked. If a subsequent ‘bank reconciliation’ is to balance then the temptation arises not to record the sales either. However, the cost of sales must still be paid and harder to hide. Therefore the business looks like it has low sales, low margins and low profit- and its value becomes diminished.
- The practice often leads to keeping a two sets of books – one for the tax office (ATO) and one for a prospective buyer
- If the business owes money to a bank manager or if a loan is being applied for, it is common that the bank wants to see regular financial statements (often monthly). Problems will arise if the bank can’t reconcile true sales figures with actual short-banked receipts (which the bank can plainly see). Lying to the bank can also have dire consequences including loan refusal or a demand for full and immediate repayment of an existing loan.
- Even if two sets of books are secretly kept for a long period of time without discovery, there will come a day when the secret has to be revealed to a prospective buyer.
So who wants to admit fraud to a perfect stranger? It is easier to refuse to hand over the financials. If you encounter this – walk away! It is odds on that the owner is living out of the cash register and keeping two sets of books.
For more on business planning check out Famous Failures of the Most Successful People In The World at http://garyweigh.com/starting-up-your-own-business.html
Until next time!