Is your company privately held? Is it as yet unprofitable, but with forecasts calling for reaching cash flow break even within the next 6 to 18 months? Have company operations primarily been funded through the issuance of equity? Do investors or venture capitalists sit on your board of directors, help with your company's financial direction and dictate how information about your company is disseminated? The way you run your business – whether you show fiscal discipline or not – should be your business and no one else's, right? I mean, you're not a public company, so you don't have to provide financial statements to anyone you don't want to. Right? Think again!

There is a growing distrust in corporate America. Companies large and small that seek to do business with one another increasingly want to evaluate whether their partner will be in business six months after the deal is struck. The current economic situation in the U.S. does not stop commerce; it just necessitates knowing who you're doing business with and determining the potential risks of doing business with other companies. You don't want to agree to a multimillion dollar contract with a company without having some assurance that the company can pay its bills or, on the other side of the transaction, will remain in business long enough to provide, maintain and enhance the product or service. Due diligence usually involves assessing the financial viability of the company. When the company is publicly held, financial statements are easy to obtain on the Internet; and, quite often, equity analyst reports will also be available to help identify strengths and risks. However, when the company is privately held, the only option is to ask for financial statements directly from the company and perform an independent, high-level analysis of its viability.

To ask for financial statements is a reasonable request so that a company can understand another company's financial performance to determine what risks might be involved in doing business with that company. Any company that refuses to comply with a request for financial statements (hopefully audited) is experiencing one of two things. The company could be overly confident about who it is and what its place is in the market. The other possibility is that it has something to hide. More often than not, it's the latter. Either way, it should be a red flag to the company requesting the information.

The management of the company being asked for information may say, "Hey, we're in an emerging market. We have high start-up costs. We can't provide our financial statements because you can't possibly understand our situation ­ that being unprofitable is just a factor of being in the market today. Everyone's unprofitable. What's the big deal?" Baloney! The tech bubble burst two years ago! While being unprofitable was actually valued briefly during the Internet tech bubble, it is not valued today. In our capitalist society, businesses are expected to do business the old-fashioned way ­ by making money. Are your revenues not what you had hoped for? Have you inflated your sales and marketing expenses trying to get product out the door? Any unprofitable company that plans to survive must have a solid plan for achieving profitability within a short time frame. Additionally, a plan is not enough. Your company needs to show that is has the fiscal discipline to lower costs to match revenues. Investors no longer have the patience to apply their deep pockets to keep a faltering company in business indefinitely.

The risks of doing business with a company that is not profitable, or does not exhibit fiscal discipline on its road to profitability, need to be identified and then mitigated. You may want to require periodic (monthly or quarterly) financial statements to monitor performance toward its forecasts. You may even want to negotiate financial covenants into the contract that call for some action (e.g., delivery of application source code) if certain conditions are not met (e.g., total cash/liquidity falls below a certain amount).

In this day of accounting irregularities in publicly held companies, is there any reason to believe that privately held companies are immune from such problems? There shouldn't be. It should be a matter of procedure to ask for financial statements of a company with which you intend to do business. Additionally, it should be part of doing business to provide those statements when asked. If your company can show fiscal discipline toward reaching profitability, you should have nothing to worry about. If your company can't readily demonstrate fiscal discipline and doesn't want to share information about its financial situation, it will no doubt lose business because of that fact. A healthy skepticism about company solvency exists in the market today. It's a tougher, but fairer world out there! Let the solvent company with a competitive product in a growing market win!

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