Analysing Annual Accounts
The next in our final series of blogs for 2017 looks at Financial Analysis. This is a key aspect of both Sales and Acquisitions, and certainly forms a major part in any due diligence exercise. Whether buying or selling, or even simply carrying out an assessment of yours or another business, there are many aspects to look for, far too numerous to detail here.
Any assessment will certainly include a full analysis of the Balance Sheet and Profit & Loss Account, so here is a very quick list of some often hidden points to look at in the Balance Sheet.
1. Valuation of Fixed Assets – where tangible assets may be understated or overstated relative to fair value, as assets are often recorded at historical cost.
2. Physical Condition of Assets – where the actual assets are actually in poor condition, often as a result of under spend on capital expenditure or maintenance, perhaps to artificially boost the company profit, leading to additional future hidden costs.
3. Quality of Debtors – a key aspect, where for many reasons, especially for long outstanding debtors, these may in practice not be collectable.
4. Understatement of allowances and discounts - where profits are effectively overstated due to hidden, often volume related year end allowances, discounts or rebates given to customers.
5. Overstated Stock - Especially where the trend of stock value is rising, which may indicate obsolescence and lack of marketability. A physical stock check and inspection is absolutely essential.
6. Valuation of short term Investments - including securities or hedging instruments, where the valuation may be out of date, incorrect or flawed.
7. Working Capital – an essential careful check is required, for example debt-like items may be misclassified as working capital.
8. Finance Leases - may be incorrectly classified as operating leases to avoid recognition on the balance sheet as debt.
9. Understated Liabilities – for example pensions liabilities, contingent liabilities to be provided for, or lawsuits not recognised.
10. Deferred Tax Liabilities - these can also be misstated.
The foregoing is only a quick initial list of potential problem areas, a full list of due diligence aspects is easily available. A full diligence check, in particular linked to the kind of business in question, is absolutely essential. As always, in almost all cases, some form of specialist professional help pays dividends.
1 December 2017