Counting Your Cash is Not Accounting

So, you wanna see my accounting system? Well then, here you go!” Larry (not his real name) opened a drawer on the left side of his desk and it was loaded with cash, piles of green bills. “The only accounting system I need is right here. I count it every night.”

Larry’s son had called me a few weeks earlier to help he and his Dad sell their business. Larry was dealing with a recurrence of pancreatic cancer, and his son told me they wanted to sell the business before they had probate issues. It seems Larry was on his 3rd wife and she didn’t get along so well with Larry’s son. Let’s just say the son was motivated to get the sale completed and not have to be in business with this step-step mother (that’s what he called her.)

Larry and his son had, what appeared to be, a very successful business. I visited with them twice to understand how the business worked and understand their objectives. On my third visit, I learned about Larry’s so-called accounting system. While he ran a perfectly legal business, his financial reporting methodology was completely irresponsible. Everything happened in cash, and Larry told me he never felt a moral or legal compunction to count the cash in a way that suited Uncle Sam.  How, over 30 years, he never got in trouble with the IRS is something I’ll never understand. Suffice it to say, once I figured out Larry’s method of accounting, I told him I could not help him.

I’ve seen some quirky accounting systems over the years, Larry’s being the worst, and it gives rise to a startlingly simple premise about how to sell a business. Good records don’t just help in selling a business, you literally can’t sell a business without good financial records. Now, what constitutes good records might be subject to your situation. If your business has revenue of $2 million or less, and you have compiled financials on an established accounting platform like Quickbooks, you are probably ok. If your business has revenue of $2 million to $20 million, you ought to at least have your financials reviewed every year by an accountant. The phrase “reviewed financials” means more than having an accountant reading your financials, it’s an actual type of accounting analysis that most buyers will require of a business that size. Of course, the best type of financial analysis is an audit. Yes, I know this can be expensive, but I promise when you sell your business, having audited financials make the process faster and you will likely sell your business for more.

Larry was not able to sell his business before he passed away. His son was able to sell off a few of the assets, but for pennies on the dollar. While his example is the extreme of how not to run a business, I am surprised how many otherwise good businesses have lackadaisical accounting practices. Having an accounting system that accurately tracks revenue and expenses is not an expense, it is an investment.

JIM CUMBEE is President of Tennessee Valley Group, Inc. a retainer-based business brokerage and transition mediation firm in Franklin, TN. Cumbee is an attorney and has an MBA from Harvard Business School. Jim is the author of Home Run, A Pro’s Guide to Selling a Business. https://www.amazon.com/Home-Pros-Guide-Selling-Business/dp/1599329239 .  He has a wide range of corporate and entrepreneurial experiences that make him one of the most sought-after business transition advisors in the state of Tennessee. The story above is true, but the names and fact patterns above have been changed to preserve the parties’ identities.

The following two tabs change content below.

Tennessee Valley Group

Jim Cumbee established Tennessee Valley Group to help business owners fulfill their dreams for life after business ownership. It’s a mission that his 30+ year career history had prepared him well for—in addition to being an attorney, transition mediator and business broker, Jim has been a buyer, seller, and entrepreneur. His broad range of experience gives him unique insight into how business buyers and sellers can achieve their goals.

Latest posts by Tennessee Valley Group (see all)