Your company’s investors will want to know where their money will go, while creditors will want to ensure you can repay your debt. This makes your organization’s financial health a major concern for venture capital or private equity investors, private companies looking to invest, and potential buyers. So whether you are raising capital, borrowing money, or planning to sell your company, you want to prove your worth as a low-risk business asset.
Through business valuation, the economic value of your company is determined through a process that estimates the value of your business by evaluating all aspects of the business, particularly its financial health and stability. Whether the valuer or analyst uses market capitalization, the times revenue valuation method, the earnings multiplier approach, the discounted cash flow method, book value, asset valuation, liquidation value, or another business valuation method, they will need to evaluate your financial statements.
But what happens if a company cannot present accurate financial statements due to poor financial accounting processes, controls, and reporting? In this guide, we will discuss how finance and accounting affect your business valuation, the importance of accurate financial reporting, and how to increase your valuation.
The Importance of Accurate and Complete Financial Reporting
Financial statements like tax returns, income statements, statement of cash flows, balance sheets, assets and liabilities value reports, income statements, and statements of stockholders’ equity will not report the market value of your business. However, because they are reports on your company’s past recorded transactions, they will be used as a basis for perceived future transactions. When a business can prove that it is profitable with positive future cash flows, its valuation increases.
Therefore, substandard accounting and bookkeeping can put your valuation at risk, particularly when a transaction is about to take place. And even if buyers and investors won’t be performing the valuation on your company themselves, they will still want to look at your financials and feel confident about their investment.
Accurate accounting translates to budget control and financial stability. If you cannot provide accurate financial statements like debits and credits report, net income tax statement, cash flow statement, balance sheets that show accounts payable and accounts receivable, and other up-to-date financial information, you expose your company’s poor financial management and decision-making. As these are signs of a sinking ship, investors will likely back out even before the analysts are done with their valuation. After all, if you aren’t monitoring your finances and enforcing accounting principles, then it’s unlikely you’re controlling costs and being proactive about improving your bottom line.
When you have an inefficient finance and accounting function, you are susceptible to errors and delays, which may result in the doubling of work, overpayments, and lost revenue. Outdated systems and lack of internal controls also mean you are at high risk of becoming a victim of fraud. All these warning signs will ultimately impact the valuation of your company because an unproductive and incompetent finance department reveals poor business management. When a company is managed poorly and lacks business intelligence, it is unlikely to be a profitable and worthy investment. On the other hand, accurate and efficient finance reporting shows that your business is poised for growth.
Increase Business Valuation with Defined Processes and Best-in-Class Accounting Systems
You can avoid a lower valuation of your company by ensuring your finance and accounting standards and controls are well-defined and documented. When it comes time for valuation, you need to be prepared with accurate financial statements, which you can achieve by improving the quality and efficiency of your financial operations, implementing formal policies and documentation, and applying controls that ensure validity and accuracy of your financial statements and help you achieve compliance.
To fill the gaps in your finance department, you will need the expertise of a CFO, controllers, bookkeepers, and accountants. The right people will ensure your company’s accounting and financial reporting run smoothly, and that financial reports are accurate and up-to-date when you need them in time for valuation.
From income statements to cash flow projections and sales performance reports, investors will want to see a variety of detailed financial statements that will give them a comprehensive view of your financial performance. They will want to see if you have monitored your financial activities and productivity with metrics and key performance indicators.
Robust, well-integrated accounting systems are key to driving process efficiency. Old accounting software, paper-based trial balances, and spreadsheets are prone to inaccuracies and redundancies. To improve our business accounting and bookkeeping and increase valuation, you should switch to AI-powered accounting tools and cloud-based computing solutions. With advanced accounting software, you benefit from a centralized system that eliminates the duplication of work, increases performance visibility, and leads to better decision-making.
Unfortunately, hiring in-house accountants and bookkeepers and purchasing and maintaining the most advanced accounting software is expensive. And the reason you’re suffering from poor finance reporting and accounting is probably because you don’t have the budget to hire a full-time finance department or invest in cloud computing and automation.
The good news is that you don’t have to. Rather than use your budget on salaries or costs to buy sophisticated accounting technology, you can outsource your finance and accounting functions to a third-party service provider. Finance as a Service solutions combine the integration of industry-leading software with a team of financial experts that are dedicated to supporting your company’s financial needs. And when the time comes for valuation, you will have a strategic partner that is prepared to quickly generate all necessary statements, reports and due diligence support.
The more streamlined and efficient your finance department is, the more stable and scalable your company becomes, which results in a higher valuation. Because your financial statements are a peek into your company’s financial health and performance, they are indicators of whether your business is a worthy investment.
The best way to ensure your financial reporting is accurate and complete is by filling the gaps in your finance and accounting department. This may involve hiring a fractional CFO to bring C-level leadership to your inhouse finance department or outsourcing your bookkeeping, back-office support, financial analysis and planning, or controller services. When you outsource to a reliable and enterprise-level Finance as a Service partner, you gain access to the finance professionals, streamlined processes, and advanced technologies.