Funny Numbers

BY MATTHEW D. MOHR

As a business closes the books on the previous year, it is of great importance to scrutinize the final income statement and balance sheet to ensure a business is being properly run and the numbers are accurate. Most people have some understanding about how the famous Enron accounting scandal involved hugely fictitious numbers and accounting fraud. All business owners must take the time to completely understand their own numbers to make sure the accounts are accurate and make sense.

A friend of mine was extremely good at leading his business enterprise, had an unusually high level of industry understanding and was very well respected, but left accounting to another family member. After years of showing good profits and strong sales growth, the business owner became stretched for cash. He could never quite understand how he was so profitable and yet never had enough money in the bank. Naturally, as a family-owned business, the higher the profits, the more money was paid to each family member, especially those involved with running the business. When searching for his cash, my friend was led to believe the business growth meant more cash was constantly needed to acquire inventory and cover accounts receivable. When my friend sold his business, he faced a shock.

The new owner carefully evaluated the business and discovered many years of faulty accounting. False profits were created by shifting expenses to inventory and, as a result, the inventory balance was overstated and the money, generated from loans, was paid to the family owner/employees in the form of performance bonuses. To the best of my knowledge, my friend paid off the creditors, but refused to recover anything from other members of his family, including the ones involved with the accounting “mistakes.”

A rather unhappy situation for my friend, which could have been avoided if he would have paid more attention to his financial statements. PB

Matthew D. Mohr CEO, Dacotah Paper Co. mmohr@dacotahpaper.com