Cash is King and the King Likes Attention
Everyone knows that “Cash is King”, right? Cash is critical to a businesses’ survival. But unreported cash can be a problem for a business. There is a tendency for many business owners to hide cash, under report revenue, or exaggerate expenses in order to reduce their tax bill (illegally). Two obvious downsides to doing this, besides facing an IRS audit, are:
- If the owner needs a loan to cover receivables, inventory, or expansion, it is likely the bank will turn down the loan application or not offer as much as the owner needs because the business will look “weaker” than it should. We have also seen banks call outstanding notes based on poor financial reports. It doesn’t matter if the customer is making all their payments, if the bank thinks there is something wrong with the business, they will ask the business to find a new bank. It happens!
- The other major impact of under-reporting financial results is that the value of the business becomes greatly diminished. If an owner tries to sell their business with hidden cash, inflated expenses, and unreported revenue, buyers become very skeptical, and banks will only base their loan approval on the tax returns of the business the buyer is pursuing. So a potentially strong business becomes much less desirable in the marketplace, the price has to drop, and the seller may need to finance the sale!
It takes several years to clean up the books to improve the business value. That’s great if you have the time and there are no emergencies. But “things” happen and a business owner should be prepared.
If you want some great advice about how to get the most for your business, talk to one of our experienced Apex Business Advisors.
Doug Hubler
President
