Robust financial record-keeping is a sign of a well managed business. Detailed accounting practices allow for better oversight, judgement and decision-making. Annual management accounting is standard procedure for limited companies, though if you are planning to exit your business within the next five years, a monthly approach might be more beneficial.
In this post, we explain when financial records can present an unrealistic picture of business health, and how changing your approach to reporting could unlock business growth and build value.
Why are extended financial reporting periods a problem?
Lots of businesses set annual or quarterly KPIs to focus and guide their activities and monitor performance. Setting quarterly goals is achievable and regular reviews help keep you on track to achieving company targets. However, following the same process with business accounts can be problematic. Taking a monthly view is much better management practice; even more so if you are planning your business exit strategy.
There are two big problems with only producing annual accounts:
- Annual accounts don’t give potential buyers a clear and accurate snapshot of current business performance. Let’s assume your financial year ends in March, and you decide to put your business on the market that autumn. This means buyers have no access to your last 5-6 months’ performance figures. That’s a black hole where you have lost sight of income, expenditure, debtors, stock holdings, and profit available for reinvestment. In the time since you produced your annual accounts, business performance may have declined, your wage bill may have increased, gross margin could have decreased, turnover stagnated, profits fallen… the list of potential issues goes on.
- Senior management don’t have sufficient data to make informed business decisions. This is crucial as you build momentum towards selling your business. Every decision you take has the potential to impact the value of your business. So many owners fail to consider this in the years running up to their exit, and the result is often detrimental to the final sale price.
One scenario in which annual accounts can be helpful
Seasonal businesses experience peaks and troughs in turnover throughout the year. Annual accounts tend to show the truest picture of business health, however monthly snapshots still have significant value if you are planning to sell. We have never met a prospective buyer who doesn’t want to assess current financial performance.
Why monthly accounting is best when selling your business
Oversight and control
Monthly financial reporting gives senior managers better oversight and control of what’s going on in the business. Access to real-time information can help identify potential cash flow issues and solve them before they blow up into bigger problems that could impact business value. Spotting operational issues early is preferable to a buyer coming along and noticing a pattern that could, and should, have been corrected months ago.
Attention to detail
Accuracy equates to value in the eyes of a buyer. Producing clear and transparent business accounts each month creates trust in you as a vendor. The ability to quote accurate, recent figures, and provide an immediate snapshot of recent performance can make a great first impression with interested buyers.
Owner confidence
Knowing your numbers will help you to feel confident responding to questions about current performance. This is particularly important during the due diligence phase of a sale, when hesitancy and delays can quickly erode trust between parties.
Identify efficiencies
A monthly performance snapshot will highlight internal and external factors affecting performance. Often, a simple change to systems and processes will iron them out. It may also present an opportunity to do things differently, in a way that could increase profits and business value.
For example, an increase in work in progress value may indicate staff are not completing jobs efficiently. When you follow this up, you discover this is because parts aren’t arriving on time or being stored in the correct place. You increase the order frequency and amend the goods-in process to make sure the relevant parts are stored correctly. As a result, work in progress reduces, production levels increase, and more customer orders can be fulfilled. Changing two things directly influences profits – and you didn’t have to wait until the end of the year for your accountant to point it out to you!
Monthly reporting is more meaningful to buyers
Strong financial performance is a driver of business value. Missing or late accounts is gifting buyers with an excuse to lower their offer. A robust financial record-keeping system and access to monthly performance reports presents your business in a whole different light. Thankfully, automated software makes monthly reporting much easier to produce, and with Making Tax Digital obligations now a reality, most businesses already have access.
Efficient, profitable and well-run companies report on financial performance and results every month. Senior management then analyse the figures and what they mean for current and future performance. Operating in this way creates opportunities to identify underlying issues and influence outcomes that impact business value and the price a buyer is prepared to pay.
Building business growth in the years leading up to selling your business is the best way to increase its value. If you are considering retirement or a new challenge, book a free 30-minute discovery call to find out how we can support you.
