Before buying a business, check two things on the balance sheet: verify the date and reconcile the bank account balance with the financial statements. These simple steps reveal whether the accounting is reliable.
Foreign. If you are buying a business, we are going to talk about the number one thing that you should be doing when it comes to getting the financial statements and has nothing to do with the profit and loss statement. It's the balance sheet that is what you should really be paying attention to. But we are going to go over 2 take home tips that you can immediately put into practice as far as your next business acquisition opportunity. And here's what that is. Most of the times when I see someone generating a balance sheet statement or even a profit and loss statement, really pay attention to the date that the statement was generated. So if you were asking for a current financial statement and they send you a statement that Sundays as of March 18, that is not an accurate representation of where the business currently stand stands. Because if you look at it, today's March 18th. This is in the middle of the month. Businesses have expenses constantly coming out and then also revenue constantly coming in. So in most cases you can never really tell what the full month is going to look like until it actually closes. So when you're asking for financial statements, I would always ask them to provide it as of the last financial statement period. Right. So that's the first thing you should be looking at. When you receive financial statements, you need to be paying attention to this as of date, whenever that financial statement is generated and if it says something like today's date, go ahead and ask them to resend it and make sure it's the last previous date. So the second and most important tip of today's video is to look at the bank account balances. So if you are asking for financial statements which you should be asking for the last completed period, let's just go ahead and say it's February 29th, right? The end of February. Well, you should be looking at how many different checking accounts that this company has. If it's one, it's pretty simple. That means there's one bank account. If there's two, if there's three, you know, then you need to be asking for three, two or three bank account statements. Now you might get some resistance from the seller in which they don't want to provide that to you. Just go ahead and ask them. Hey, take a screenshot of the bank balance from the bank statement. You don't have to show me all the details with all the expenses if you're not comfortable with it. You just need some sort of verification of what the reported bank balance is is from the actual banking institution. Why you might ask it is because we are going to take that information and compare that to the balance sheet of that last reported statement, which in this case is February. So you should be able to look at the February bank statement balance and the February financial statement balance sheet and compare the two, and they both should be matching penny for penny. And this is the number one tip I can provide when looking at financial statements to get an immediate assessment of how good the quality of accounting is. If you have a bank statement balance of $40,000 and you look at the financial statement here on the balance sheet where it says $35,000, now you know you have a problem right now you have a discrepancy of over $5,000. Where is that discrepancy coming from? This can immediately point out accounting problems that the company may or may not be having, which may lead you to ask other questions. It's kind of like doing a house inspection. You walk into the house, the first thing you look at, you look at the roof and you see some water stains, right? What are you going to ask yourself? Well, you're the next thing you're going to jump to is like, oh, well, I wonder if the roof is bad, right? Then you're going to start looking at everything else in the house. Are there water stains in the ceiling, in the kitchen, or in the dining room in the master bedroom? You're going to start digging a little deeper, right? And this is the same thing on the accounting statements. This is the first surface level check I do. And we actually do this in our business every single month. When we close our month, the very first thing I do is look at, okay, does the checking account match the checking account balance on our bank statement? If it does, and we've gone ahead and reconciled the bank statements for the month, we're good to go. If it doesn't, we have an accounting problem that we need to dig into and look at further. So the next time that you're evaluating a business for an acquisition opportunity, make sure you are getting the last completed financial statement period, and that you're also asking for the corresponding bank balances. So that way you can tie those bank balances out to the balance sheet and financial statements. See you next time. I hope you enjoyed today's video and found a ton of value from this content. If you did do me a favor, go ahead and like and subscribe below. Also, check out our Passive Business newsletter. Our intent is to help you grow in your business, and we're going to be sharing the best practices and tips along the way to get you to where you want to be. See you next time.
