The Art of Business Valuation

CHAPTER 11Accounting Issues with Small and Very Small Businesses

One of the major differences between larger business and smaller businesses is the quality of the financial information available to management and valuators. Small businesses, as a rule, have poor quality financial and management information. Many small business owners and managers manage by walking around. They are in the middle of every decision. Therefore, they are relying on direct observation instead of reports that summarized other people's observations. Of course, when it is time to value a business, the valuator does not have the ability to directly observe matters on a continuing basis. This is why many small businesses can be run well yet have few proper reports. This lack of reporting creates many difficulties for valuators. Some of the difficulties and starting points for solutions are discussed below.

CASH, ACCRUAL, AND TAX BASIS STATEMENTS

Accounting statements and records are kept in many formats or methods. Each method has its advantages and disadvantages.

One of the most important principles of accounting is consistency. The theory is that if accounting is not performed consistently, the data will not be valid and useful. Consistency starts with the basis of accounting used. Consistency is very important in the application of cut-offs between accounting periods. Consistency applies to coding the same expense to the same category every year. (Yes, one client did code rent over a two-year period ...