A Lesson from the Mafia

Many successful entrepreneurs have a good understanding of the numbers, yet aren't numerically informed. Financial statements clouded with personal perks and extraordinary items don't reflect the organization's actual operating results or earning power. 

Which leads us to our lesson from the mafia–keep two sets of books. 

That may sound like an illegal proposal, but it isn't. One set of books should reflect financial performance from the perspective of an outsider interested in buying the company. I call it an Operations Statement. It excludes "owner transactions" and allows an uncontaminated look at true earning power-which is what a prospective buyer or appraiser needs to determine. Look at it this way: What expenses would an owner not employed in the business be able to do without? The owner's automotive expenses, life insurance premiums, dividends, owner compensation above what would be paid to someone assuming the owner's responsibilities, and unnecessary business travel are prime candidates. The other set of books may be the same as or very close to what you're doing now. The Tax Statement includes the above items and tracks your taxable income. It's an excellent tool for tax planning. 

An Operations Statement removes extraneous items and shows an organization's real earning power–and earning power is what buyers pay for. Determine your company's value on the basis of the Operations Statement. It's useful for those on the outside, whether banker, potential buyer, or an appraiser placing a value on your business for financial planning.