Wednesday, May 28, 2008

How important are good records?

I was reading a story from the New York Times this morning regarding the declining value of small businesses during this economic downturn. Not surprisingly, there are a lot more sellers than buyers which is driving down prices.

While it did not surprise me that small business valuations were falling, what I found most interesting and valuable was this little bit of information from the end of the story:

"... an unpleasant truth is that many, if not most, businesses do not sell. For decades, the conventional wisdom was that brokers sold about one out of five businesses they listed. But a new study by Louis O. Vescio, owner of Sunbelt Business Brokers in Melbourne, Fla., found that the percentage was only 10.5 percent.

The main reason, Mr. Vescio and others said, was that 'most small business owners keep bad records,' so buyers cannot get an accurate financial picture."

As I wrote in my blog last week, a good accounting system is extremely valuable to a small business. I see too many business owners who fail to adequately invest in their accounting and information systems because they don't see the value and they don't have the knowledge or expertise. This approach is ultimately costly when the entrepreneur creates a potentially valuable asset that can't be sold.

Accordingly, I recommend that business owners make adequate investments in their accounting and record keeping systems. This aspect of a successful business is no less important than HR, marketing, sales, operations, banking, etc.

A good accounting system is efficient, fairly easy to maintain and provides a number of key functions like reporting, analysis, security and operational control.

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