Financial statements do not necessarily present an accurate picture of a company’s operations. They are based on accounting principles and tax regulations and may not show a business’s true earning capacity or value. So, as part of an accounting cleanup, WWLC works with clients to normalize, or adjust their financial reporting.
Preparing an adjusted set of financials is particularly important when a company is contemplating a fundraising or a sale. It is best to prepare an adjusted set of financials to complement your unadjusted numbers; doing so will address common shortcomings like these:
- Owner’s Draws: LLC members may be compensated in the form of owner’s draws rather than through payroll. These draws may not be reflected in the income statement.
- Market Rate Adjustments: Some related party transactions, like rents charged by an owner’s real estate firm, are compared to market rates and adjusted accordingly. The goal is to better reflect a business’s economic reality.
- Discretionary Expenses: Expenses that are incurred that are not necessary for normal business operations. These can include travel and entertainment, charitable contributions, automobile expenses, even club memberships. Typically, these expenses are eliminated or reduced to levels common in a particular industry.
- Tax Reduction Entries: One-time, year end tax reduction measures may need to be adjusted. While advantageous from a tax standpoint, these expenses can show the business as less profitable than it actually is.
- Friends and Family: Not to be confused with related party transactions, I refer here to organization charts that include “underworked” friends and family members. Positions that really are not necessary to run the business. Financial statements should be adjusted accordingly.
- Cash Sales: While preparing for a due diligence review it may be necessary to address underreported cash sales.
These and other adjustments involve sensitive, personal disclosures and must be handled in a discrete and professional fashion. WWLC has an unblemished record of helping small business owners maximize their business valuations by helping them with accounting cleanup tasks like these. Drop us a line. We can help you establish a sound basis for your financial reporting, too.