There has been much
written and numerous discussion, pro and con, concerning the benefits
of obtaining financial statements from customers.
The major reason for not obtaining
financial statements is the seller’s management often fails to
support the need for financial information so it is difficult to
establish or enforce a policy requiring the customers to provide this
In light of Enron, WorldCom and several
other firms recently discovered to have not disclosed or omitted
pertinent information, many now question if financial statements are
relevant. After all, if the information reported fooled Wall Street
analysts how is the uninformed or amateur analyst supposed to be able
to detect incorrect accounting practices? At this writing the
Securities and Exchange Commission (SEC) reports they have 300 active
on-going investigations of suspected fraudulent financial reporting by
publicly held companies.
Add to this the new Sarbanes-Oxley Act
that has many professional accountants raising questions about
accounting procedures and the analysis of financial data becomes more
confusing then it was before 2000.
The problem with financial statements
long before all this mess was revealed was they reported past
performance. Whether a concern reported spectacular or poor financial
results was no assurance they would continue to do so. This is why it
has always been recommended when analyzing financial information the
analyst has at least two and preferably three years of data so a trend
could be established.
How often, however, do we as for a
business plan? This is something all businesses, not just start-ups,
should prepare annually. A business plan is the company’s “road
map”. A business without a plan is similar to driving to a
destination without a map. One would eventually get to their
destination but how much time would be spent along the way lost and
The importance of the business plan
forces the company to examine its strengths and weaknesses and
identify what needs to be done to succeed. Thus the business plan is a
written statement of the company’s goals and strategies and presents
information others, such as trade creditors, bankers and investors,
may need for evaluation.
A well-written business plan should
include the following elements:
– a brief statement that highlights the main points of the business
plan, including the type of business (manufacturer, distributor,
retail), the products or services provided, type of customer, company
goals and objectives and history of the business.
– a one to two sentence statement focused on the company’s highest
goals and core purpose of the business.
– identifies the products/services the business sells and describes
the benefit of the products/services.
– describes how the day-to-day operations of the business is run and
describes inventory and supply levels. This could also contain
biographies of key owners, officers, and employees.
– this section should address the legal structure of the business
and include any information about changes in the legal structure
during the next twelve months. Also included would be any information
about insurance, health and safety issues, zoning requirements and
expansion or downsizing issues.
– identifies major competitors and comparison of products/services
in terms of quality, price and customer service. This should address
why customers would choose doing business with the company rather then
– identifies current customers and markets and how the business will
promote and sell product/service during the next twelve months.
– includes a list of assets, liabilities and net worth.
– includes projected expenses such as payroll taxes and employee
benefits, rent, utilities, supplies, insurance, advertising and
promotion and projected cash flow.
– any new equipment purchases during the next twelve months
including cost, estimate life and monthly depreciation.
Sources and Uses of Financing – a list
of financing sources and a summary of what the cash will be used for.
A well-prepared business plan is the sign
of a successful organization, is often easier to obtain then financial
statements, and more easily interpreted then financial statements.
I wish you well.
information is provided as information only and not legal advice.
Legal advice should be obtained from a competent, licensed attorney,
in good standing with the state bar association.