Do-It-Yourself Finance Follies:
Lessons Learned the
Hard Way
Keeping a complete and accurate set of books and records is absolutely critical to the process of becoming a great businessperson.
You may remember in school that debits are on the window side of the room, and credits are on the other side of the room. Pretty basic, wouldn’t you say? And maybe even enough to get you started keeping your own books to save money.
You will regret that decision as you discover that no matter what steps you take to grow your business, everyone will ask for your financial statements as a reflection of your growth, your revenues, your profits, and a glimpse into your likely growth prospects. And when people discover that you have prepared your own financial statements, an air of suspicion develops quickly.
There are many, many little tweaks that must be made to a financial statement, however, to keep them accurate. And this is important because you never want to be accused of doctoring your books to obtain a specific outcome.
Here is a small but possibly material example of this issue.
Have you ever been looking for office, warehouse, or retail space for your business, and the landlord offers you the opportunity to pay less rent at the beginning of the lease in order to entice you into signing the lease?
While there are a host of incentives that a landlord can offer to a prospective tenant, one of the most powerful is the lure of lower, or even a period of free rent at some point in the lease term.
You may be thinking that this is really exciting because your financial statements will show a profit as the result of this lowered rent payment. And with this increased profit, you can go into a bank and get a line of credit. Or you can send a financial statement to your investors showing a nice profit. It makes you look smart if you can earn a profit from the initial phase of the business.
You may believe that this is a little advantage by deferring one of your larger expenses. But when the month comes, as it always will, when rent is paid and must be reported, and your profits sink as the result, how smart will you look then?
But wait, if you prepare your financial statements per GAAP (generally accepted accounting principles), you must recognize your rent payments on a level basis over the lease term. This means that you must take all your rent payments over the term of the lease and divide them by the number of months of the lease.
When you compute this number for an average monthly rent, any difference between the actual payment and the average monthly payment will appear on your balance sheet as a liability or a current or non-current asset on your financial statement.
So, before you get excited about showing a great financial statement due to the temporary lack of a full rent payment for a time, or even no rent payments at all, it will catch up to you.
There’s more to the preparation of accurate financial statements than just accounting for cash in, and cash out.
This is one of the important reasons that you need to have a skilled team who understands each of these details from the very beginning.
The place to start is to have an experienced business attorney as your consigliere (most trusted advisor).