Cleaning up your books before a fundraise

Founders tend to think of financial due diligence as an audit — someone checking whether the numbers add up. It is not. It is an assessment of how much the numbers can be relied on, and by extension how well the business is run.

That distinction decides whether diligence is a formality or a repricing event.

What diligence actually tests

Four questions, in roughly this order of importance:

1. Is the reported profit real and repeatable? Quality of earnings.
2. Does the balance sheet tie? Every material line supported by a schedule that agrees.
3. Is there anything undisclosed? Contingent liabilities, related-party dealings, disputes, pending notices.
4. Is the process credible? Does this business close its books monthly to a discipline, or reconstruct them annually under pressure?

The fourth is the one founders underestimate. A business that closes monthly and can produce a reconciled pack for any month on request signals competence in a way no deck does. One that needs three weeks to answer a simple question signals the opposite.

The eight things that get flagged

1. Unreconciled balance sheet accounts

The biggest single red flag. Bank balances that do not agree to statements, receivable control accounts that do not match the ageing, suspense accounts with real money in them. Each one raises the same question: what else is wrong?

2. Revenue recognition that shifts

Recognising on invoice in one year and on delivery in another, or booking annual contracts upfront without deferring. Any inconsistency invites a restatement of the growth rate — which is usually the whole investment thesis.

3. Owner-related expenses in the P&L

Personal vehicles, family salaries above market, personal travel. These get added back in quality-of-earnings — but only if they are identified and documented. Found by the other side rather than disclosed by you, they become a credibility problem rather than an adjustment.

4. Related-party transactions

Sales to or purchases from entities the promoter controls. Not fatal, and often entirely legitimate — but they must be disclosed, at arm’s length or explained, and consistently presented. Undisclosed ones are treated as concealment.

5. Receivables that will never be collected

An ageing with material balances beyond a year and no provision. Either they are collectable — in which case, why have they not been collected — or they are not, in which case profit has been overstated for years.

6. Inventory that isn’t there, or isn’t worth it

No physical verification, no provision for obsolescence, valuation methods that changed. Overstated stock overstates profit directly.

7. Compliance gaps

Unfiled or late returns, unreconciled GST credit, TDS deducted but not deposited. Each one is a quantifiable contingent liability, and they get modelled as a deduction from the price. Our GSTR-2B reconciliation guide covers the largest of these.

8. No management accounts

If the only financial statements that exist are annual and audited, the company has effectively been flown blind between them. That is a governance finding on its own, separate from whatever the numbers say.

Quality of earnings, explained simply

Your P&L says you made ₹3 crore. Quality of earnings asks: how much of that is genuine, recurring, and will still be there after the transaction?

Typical adjustment	Direction
One-off gain — asset sale, insurance receipt	Remove
Owner salary above or below market	Normalise to market
Personal expenses run through the business	Add back
Related-party dealings not at arm’s length	Restate to market terms
Provisions released to flatter a year	Reverse
Costs that will arise post-deal (audit, compliance, professional finance)	Deduct

Adjusted earnings almost always land below reported. That matters enormously, because the valuation multiple is applied to that number — so a ₹40 lakh adjustment at an 8× multiple is a ₹3.2 crore difference in what your business is worth.

A twelve-month timeline

When	What to do
Month 1–2	Reconcile every balance sheet account. Clear suspense. Physically verify stock and fixed assets. Provide against dead receivables.
Month 2–3	Fix revenue recognition and apply it consistently. Restate prior periods if the policy changes.
Month 3–4	Document related-party transactions. Separate owner-related costs so they are identifiable as add-backs later.
Month 4–6	Close every compliance gap. Reconcile GST credit and TDS fully.
Month 6–12	Run a disciplined monthly close and issue a monthly pack — so that by the time diligence starts you have six to twelve months of clean, consistent management accounts.

That last row is the one that cannot be compressed. A close calendar only becomes evidence of good governance once it has actually run for several months.

The financial data room

Have these ready before the first serious conversation:

• Audited financials, three years
• Monthly management accounts, twenty-four months, in one consistent format
• Trial balance and full balance sheet reconciliations for each period end
• Debtor and creditor ageing at each period end
• Fixed asset register with additions, disposals and depreciation
• GST returns and reconciliations; TDS returns and challans
• Loan agreements, sanction letters, and a covenant compliance summary
• Related-party schedule with the basis of pricing
• Revenue by customer and by product, monthly
• Headcount and payroll summary
• A 13-week cash flow and the current-year budget with variances

Producing this in a week signals a well-run business. Producing it in six weeks signals the opposite — and the other side is explicitly noting which.

Why fixing it late is so expensive

Three compounding reasons.

• Every correction reads as a discovery. The same fix made quietly in a normal month is housekeeping; made mid-diligence it is a finding.
• You have no leverage. Time pressure is entirely on your side of the table. Momentum lost is rarely regained on the same terms.
• Findings compound. Two unrelated issues get treated as evidence of a pattern, and scope expands — which costs more time and surfaces more.

None of this requires anything clever. It requires an ordinary monthly close done properly for a year — the same close discipline that makes a business easier to run in the meantime.

If you expect to raise within the next twelve months, the useful first step is an honest read of where the books actually stand. Send us your last balance sheet and trial balance and we will tell you what diligence would flag — at no cost, and before anyone else is looking. That work sits inside our VCFO engagement.