How Do We Check the Financials?

by | Nov 8, 2024

Evaluating financials is a critical step when selling or buying a business. A thorough review ensures transparency, validates the business’s value, and identifies potential risks. Here’s a step-by-step approach to checking the financials: 

How Do We Check the Financials

1. Review Financial Statements:

Begin with the core financial documents—balance sheets, income statements, and cash flow statements—typically from the past three to five years. Analyze revenue trends, profit margins, expenses, debt, and overall financial health. 

2. Examine Tax Returns:

Tax returns confirm the financials reported to tax authorities, which can reveal any discrepancies. They also provide insights into deductions, expenses, and tax strategies used. 

3. Audit Cash Flow:

Cash flow is crucial, especially for small businesses. A consistent positive cash flow suggests stability and good liquidity, whereas negative cash flow might indicate operational inefficiencies. 

4. Look at Accounts Receivable and Payable:

Reviewing accounts receivable and payable helps gauge collection cycles, outstanding debt, and potential cash flow issues. 

5. Assess Inventory:

For businesses with physical products, evaluate inventory levels, turnover rate, and obsolete stock. Excess inventory can tie up capital, while low turnover rates can indicate sales issues. 

6. Identify Key Financial Ratios:

Ratios such as gross margin, net margin, current ratio, and debt-to-equity ratio help benchmark financial performance against industry standards. 

These steps help determine the business’s financial health and provide a foundation for valuation and negotiations. 

Ensuring accuracy in financial evaluations is paramount. Engaging experienced professionals can provide the expertise needed to navigate this complex process.