The Real State Of Your Business And Personal Net Worth

It is time for the real truth, not what we want the truth to be, not what we think the truth is, but what the truth really is.

1. Are you really losing money? It’s an interesting question. Many small business owners do not relate to financial statements thus the tax return is their only clue as to what their financial condition is, yet they do not know how to correctly read a tax return either. Depreciation, interest deductions and other allowed deductions can create losses on one’s tax return when in reality, if evaluated on a cash basis, the business actually made money. Further, on other financial reports, distributions to your 401ks, a spouse on payroll, and many non-business deductions, inappropriate but very common, reduce the income and can result in reported losses when the business really was profitable.

The reality? The business is making money and a more sophisticated review will report this more accurately.

2. Is the business really profitable? On the other side of the equation, I see financial reports for many businesses that state the business is profitable when in reality it is far from it. For example, the owners who are managing the business may not be taking a paycheck. Personal credit cards are heavily used, adding financial support, but are not reported in the financial reports, thereby artificially increasing apparent profitability.

3. What is your real net worth? Net worth is often over-inflated. Inaccurately estimated equity in real estate and other exaggerations of the value of personal assets artificially elevates personal net worth.

We all seem to have developed a skill to push the numbers in any direction we choose. We see it all the time and must correct these misconceptions so we can determine exactly what the financial condition of our clients may be in order to best represent their needs, protect their assets appropriately, and most importantly to develop an appropriate workout evaluation that will result in debt forgiveness. It is crucial that the numbers are accurate and that they properly reflect what we want to achieve. Accuracy is the only option. Adjustments can be made once we understand what we have and understand where we want to be and what we are trying to accomplish. But that is legitimate planning, not unruly reporting.