Financial reporting update: Balance sheet of broken dreams
Now that you have either filed and paid your taxes on time or filed an extension with the IRS its time to breath right? No its not! Its time to continue to working on your internal processes and procedures accounting wise and strive for financial perfection!
Every year we go into power mode to get the fiscal year closed out so that we can get that information off to our CPA or your tax preparer. And then we stop, take a breath, and then go back into our traditional mode of getting behind and then playing catch up. It’s the way some dealerships work. It is what it is. No harm no foul right?
What if I told you that you may have grossly overpaid or under paid Uncle Sam this year or every year for that matter? The answer lies in how accurate your financial statements are specifically your balance sheet!
Most business owners, and we in the powersports community are not any different, rely more heavily on the profit and loss statement for many reasons to make. We make incredibly important short and long-term business decisions based on this one statement alone! But the often-overlooked balance sheet is like the redheaded stepchild of the financial statement family. And more often than not it is on this statement where all of the dealership’s mistakes, ghosts, and secrets lie!
Every account on your balance sheet should tie back to something in the real world! For example, all of your major unit inventory balances shown should tie back to a “schedule” or list of units that has the same value. The same goes for all of your receivables and your payables. Every number on your balance sheet should be detailed out with a supporting balance.
Every month your bookkeeper or accountant should be able to give you a detailed list of each account. You as an owner need to make sure that your balance sheet is tied down and accurate for many reasons. Let’s say that your profit and loss statement showed a $100,000 profit for the year. However, lets say that a major unit inventory account or physical inventory account is over stated by $125,000. Did you make $100,000 as you thought and filed your income taxes on? No you didn’t. The reality is you lost $25,000!
Recently I assisted a potential buyer of a large dealership in reviewing the seller’s books. The potential owner was so excited about getting into the powersports industry and was a businessman with an MBA as well as a CPA designation. As he and I dove into the details and looked at the supporting “schedules” to try to value the dealership we became very concerned and frustrated with the seller’s asking price of the dealership. For example, the parts and accessory inventory was valued at a little over one million dollars, however, the inventory valuation report from their dealer management system showed something much lower. This fact alone made us look deeper at every account.
The end result was that the financials had little to no validity. Their balance sheet which represents the businesses assets, liabilities, and owner’s equity was not a true representation of reality. Unfortunately, the deal fell through essentially because of bad accounting. It was almost impossible for this potential buyer to truly value the business. It was sad because this potential buyer would have done a really good job as a dealer principal! Both the seller and the potential buyer were broken hearted and deeply disappointed that the transaction did not close.
If you do not feel good about your balance sheet you need to face reality and fix it. Your profit and loss statement is not accurate until you do. You could have material issues with it’s representational faithfulness that not only affect your profit and loss statement but could affect the judgment of others outside your dealership. If your books are not proven each month you could be misleading your lenders, manufacturers, and a host of other outside entities that require you to submit your financials to them periodically.
Now that tax time is coming to a close, you need to continue working on your accounting processes and procedures. I do not want you to get to the end of your journey in the powersports industry and try to sell your dealership to only find out that you can’t get what you thought because of a balance sheet of broken dreams.
Just food for thought!
Forrest Flinn, MBA, PHR, SMS has been in the motorcycle industry for more than 20 years and has been a true student and leader serving in various capacities. He previously worked as an implementation consultant for Lightspeed and as a general manager with P&L responsibility for a large metro multi-line dealership. Currently Forrest is the managing partner and chief visionary for a consulting firm that specializes in outsourced accounting, human resources, social media strategy, dealership operations consulting and Lightspeed/EVO training.
Contact: forrest@powersportsmc.com