You do not ever want to get blindsided, and organized record keeping prevents a business owner from being caught unaware. Once you are organized and set up to perform operational tasks successfully, you can turn your focus towards business development and growth strategy implementation.
Most businesses that fail do not fail from lack of effort. Almost everyone who starts a business concept works hard. Why do businesses fail, and what self-inflicted wounds should have been eliminated with proper oversight and attention? Lack of oversight detail and consistent/orderly record keeping is the silent business killer.
Several considerations can slam the brakes on any M&A transaction, and several are preventable with early intervention and proper planning:
Lifecycle
Records have a lifespan of useful importance, and it is necessary to understand a record’s importance to the operation. Business records go through three cycles:
- Active Stage – records are easily accessible and necessary to have on hand for business operations.
- Inactive Stage – business records have lost relevance and are no longer as necessary to the business operations
- Disposition Stage – time to streamline and:
a. Destroy the record completely
b. Transfer the record to another facility or organization for archival storage
c. Or keep the record in its current location indefinitely
Minimize Stress
Nothing will remove every stressor from business ownership or business operation, but filing cabinets belong in the 20th century, and incidental lost or damaged files, weak security, etc., create unnecessary stressors that exhaust time, man-hours, and resources. Create and enforce record retention policies and a record classification system. Ever had to look for something critically important and not be able to find it? Stressful, right?
Minimize Risk
Systematic organization can eliminate theft, lost time on jobs, and inconsistent inventory availability while decreasing audit and compliance risk. Ad-hoc file saving, manual retrieval, and disconnected systems lead to profit loss and inefficient workflows. Efficient filing systems eliminate chances for employees to create self-styled cataloging and indexing. Consistency is calming. People like to know what to expect.
Harmonization
Retrieval and distribution work flow organization eliminates clutter and saves costly and complex server space by eliminating outdated and unnecessary files. Once staff members have clarity on organization and efficiency standards, the efficient workflow creates a seamless flow of operational tasks that strengthens operations while identifying comparative profitability and identifiable growth opportunities. For instance, payroll recording is one of the largest monetary outlays for most businesses. Accurate payroll records help determine average labor costs. Do you have the right people? Can you give bonuses and raises? Answering those questions will have a waterfall effect and will substantially impact the organization long term.
Efficiencies
Streamlined organization creates cost-saving opportunities from a number of business operation divisions and departments. To illustrate, a disorganized and inefficient inventory system equates to lost profitability. Great software is useless with bad information. Lack of organization, inadequate inventory tracking, no ability to forecast, no accurate inventory count, not knowing what you have to sell, etc., also leaves you open to potential employee and customer theft. Inaccurate inventory invites shrinkage. Properly managed inventory improves productivity, efficiency, and profitability, which creates opportunities to grow.
Security
Know what information exists in your paper and digital filing systems and perform regular audits to assess what information is necessary for business operation. Protect information by limiting access to data such as credit card numbers, social security numbers, personal identification information, licenses, contracts, leases, copyright, and proof of insurance documentation to limit improper exposure. Make sure sensitive data is disposed of properly once it is no longer necessary for business purposes to safeguard data from outside hackers.
Effective information security plans successfully manage four key components: physical security, electronic security, employee education, and clients, suppliers, and vendors best practices.
Physical security: lock it up and limit access
Electronic security: understand your digital vulnerabilities and hire experts to manage your network security
Employee education: Regularly scheduled employee training makes the irregular regular. Train employees to identify potential security threats and post company security policies in high traffic areas to maximize exposure. Highlight security as a critical component of the company culture.
Clients, Suppliers, and Vendors: Verify the security practices and standards of any supplier or third-party vendor (i.e., payroll, web hosting, call centers, data processing, etc.) and determine that they align with your company.
In addition, readily accessible, secure data assists employees with expedited, immediately available, and easy-to-access records for licensing requirement updates, grant applications, debt refinancing requests, and customer relationship management.
Personal and Business Accounts SEPARATE
It does not seem like a big deal to tap the business card at the restaurant, the grocery store, or the ballpark, but any accounting transaction must take place to account for the deduction. Use a personal credit card for personal expenses and do not intertwine expenses personally related or from unaffiliated business entities. Small, seemingly innocuous personal expenses add up; most are not defensible add-backs, and they will ultimately compress the company’s cash flow performance, which is the main determining factor when valuating a business for the purposes of a sale.
What Should You Keep and for How Long
History as an academic area of study is vitally important because you can determine how to proceed into the future by the lessons of the past. Start with understanding why a record or document was created. Records are created to prove that communication occurred and was acknowledged. Once the communication referenced is no longer relevant to any business activity, operation, or potential litigation, it is important to know when those records can be destroyed.
Tax documentation provides a clear historical map of all itemized deductions and potential tax savings while allowing the organization to project tax liabilities to minimize over/under payment. A complete set of accurate tax records is the best instrument to guarantee the correct tax rate. In addition, clearly outlined tax liabilities and income categories limits a business’ exposure and minimizes surprises and headaches.
Preserving information such as vendor and purchase invoices and receipts, audit reports, and customer records for research, forecasting, accurate budgeting, capex decisions, etc. assists with budget creation and adjustment in real time. Budgets and forecasts are not static documents. If utilized properly, budgets and forecasts should be regularly edited and reviewed to assess company performance metrics.
Human resources may include documentation regarding historical wage data, personnel files, medical records, contribution requirements, dependent information, etc., and could have strict retention and disposal requirements that supersede business purpose regulations. It is a critical examination document and record retention requirements for municipal, state, and federal regulations.
SMP Capital Difference
SMP Capital Partners offers investment banking services to privately held businesses and business owners. We successfully bridge the gap between main street SBA business brokerage companies with limited access to M&A and non-government underwritten capital markets and the institutional investment banking firms that acquire businesses in the middle market. With over 50 years of deep learned, real world deal experience, we have developed very specific and customized deal processes in every industry in which we have completed transactions. We do not offer a cookie-cutter assembly line process. Our team creates bespoke processes from valuation, to marketing, to targeted buyer identification, to transaction, to close, and beyond. We do not take shortcuts; we are diligent and persistent, and our process is transparent from the very start.
Interested in speaking with us? Give us a call at (704) 269-8100 or fill out our contact form, and we will be in touch shortly.