“Accounting is the language of business.” So says Warren Buffet.

But do business owners feel comfortable using this language?

And is the written form of this language, that is, a set of annual financial statements, helpful for understanding or explaining how a business performs?

Beyond the very important job of meeting your mandatory reporting obligations to the ATO and ASIC, I don’t think it does.

Bit ‘olde world” for me.

What’s needed is a modern translation whether you’re;

1. Thinking about selling or buying a business and the real money out of your pocket on the line, or
2. Wanting to improve the ‘bottom line’ of your current business

Enter Cloud Based Management Accounting.

Provided you’ve taken care setting up your Chart of Accounts and properly input your monthly data, this tech can be enormously helpful in understanding the true underlying performance of your business and/or its component parts.

Here are some practical examples of how I’ve used cloud accounting to assess the underlying performance of a business and in a sale or acquisition engagement.

 

1.GETTING CLEAR ON WHAT BUSINESS YOU ARE IN

Decades into my career, I still find digging into a set of financials fascinating.

To owners, especially when they have clocked up 20 or 30 years, their business is a pretty straightforward wholesale or technical services business (or other). Very different story for a potential buyer though.  

Many businesses have a mix of products and services. Some even have distinct business units that haven’t formally been recognised. For example, one industrial business could have three business units: One being manufacturing, the second wholesaling and the third repairs or servicing.

The tax return for this industrial business for FY24 might be say $5M in total revenue. At a very basic level you could compare it to the FY23 tax return and determine it’s up or down. But that’s not even close to the full story.

What’s compelling and valuable to understand, for both the owner and a potential buyer, is how the three business units are performing individually.

• What does each Business Unit contribute to the total revenue?
• What is the growth rate in each Business Unit?
• Are individual Business Units profitable?

With this information you can confidently make important decisions about how to improve your overall bottom line.

If you’re staying in your business, you know what Business Units are profitable and not, and where you should focus and invest your money, time and energy.

When selling, this information makes the sales pitch a lot easier. Presenting detailed Business Unit level financial information makes it much easier for buyers to understand your business’ value, and that increases the odds of selling faster and to the best buyer for the most value.

 

2. TRACKING PERFORMANCE BY COMPARING SAME PERIOD LAST YEAR (OR IDEALLY TO YOUR BUDGET)

How you are tracking this month this year is understandably the focus for owners in the thick of running their business. Today’s sales are what ultimately enable you to pay tomorrow’s wages and rent.

But there is a trap in constantly focusing on what’s happening now. In racing parlance, you’ve got blinkers on.

Improving your business needs a constant and critical assessment of key financial and other business data as the basis for making decisions to change the way the business operates and performs.

Done thoroughly, comparisons of current performance with last month, quarter or year, and/or your budget for the current year, are where you’ll find and better understand what really drives your business performance.

Cloud accounting enables you to easily go to a ‘line by line’ analysis of each revenue and expense item. Set up the right reports and you’ll soon be adept at scanning your report. Patterns will emerge and you’ll more quickly notice line items that don’t look right. With this comes the ability to make more timely decisions that feed into a better business performance.    

 

3. UP-TO-THE-MINUTE PERFORMANCE VS. ANNUAL TAX TETURNS

When selling your business, up-to-the-minute performance has a major impact on buyers’ confidence to ‘do the deal’.

Even if you have four or five years of stellar performance and all the detail at Business Unit level report (discussed above), lack of up-to-the-minute reporting can throw a spanner in the works.

Being able to produce an accurate report that reflects how your business is trading is vital. Expect savvy buyers to ask for it.

This means part of getting ready to sell and dealing with buyers who want to take a much closer look ‘under the hood’ is understanding the capabilities of your cloud accounting package.

Get your trusted business adviser involved so you can produce the reporting required to;

1. Ideally affirm the business is trading same as or better that in past, or
2. Explain why, if performance is not where you or a buyer might have expected, whether it’s
   • A seasonal issue, e.g. this quarter is always our slowest, so no underlying issue
   • Something you’ll quickly jump on to address or easily explain, e.g the start date on a project got deferred by a month

You’re in a far stronger position when you have this information and track it closely in the selling process. It also helps owners to ‘keep their foot on the accelerator’ while the sale process goes on, often for longer than planned. This is a common trap once the decision to sell is made or a potential deal looks like happening – you have to go hard until the deal is done.

 

4. BALANCE SHEET

The Profit and Loss is the major focus for many sellers and buyers in the sale process. What bottom line the business makes underpins most valuation methodologies.

On the other hand, the Balance Sheet doesn’t get the right level of attention until late in a deal.

When the questions do start to flow, they can really negatively impact the value a buyer is prepared to pay or even kill the deal.

The answers to these sorts of questions directly impact the value of your business and/or the net proceeds you will pocket out of sale.

1. What is the real value of stock? And how much do I really need to sustain the business?
2. How much working capital do I need to run the business?
3. What is the market value of the Plant & Equipment?
4. Why aren’t there staff provisions?

Early in any sale planning, you must have a deep dive into your own Balance Sheet. If you understand each line of your Balance Sheet and how that impacts, or not, the day-to-day financial performance of your business, then there can be bottom line improvements from ‘restructuring’ your Balance Sheet.

A well set up cloud accounting packages makes it easier to meet your mandatory reporting requirements.

And, you can get so much more to help improve your business today and/or to ensure a better outcome when it’s time to sell.

If you need any advice or want to talk, don't hesitate to contact me.