Running a business comes down to information. In some businesses, every scrap is meticulously recorded. In others every decisions is based on a leaders “gut feel” but at the end of the day, the decisions are all information driven. Sometimes that information is spot on – based on years of experience and accurate modelling – and it leads to optimised decisions. Generally though, this information is sketchy – based on thumb sucks and exuberant hopes – and this leads to decisions that could pose difficulties down the line. This is the fundamental risk of any business.
From a financial point of view the big question should always be, will the expenditure I’m about to undergo improve my bottom line and will it do so soon enough that the strain that it puts on the company won’t send it to the precipice of survival and beyond. If the answer is “yes”, its money well spent, if its “no”… buyer beware. Accountants will have you believe that they’ve developed a way to lay down that financial information to make it easy to understand and fool proof. But when you’re considering buying into a business or investing in one, you really need management accounts. They show an accurate reflection of the costs and incomes as they happen, of the real value of the assets and the real costs of the liabilities, of which employees are worth their salary and which ones are there for a free ride and of who really wields the power in the company. The also show if the business is seasonal, competitive, lean, diversified and truly profitable. They show you the numbers in the format that the decision makers want them and they give you the best idea of what the state of the business is and why.
Unfortunately management accounts are generally not readily available because the information isn’t collated or because you just don’t have the relationship with the seller that warrants that sort of access and thus we fall back on financials and hope we can interpret them correctly for the industry and that they are not hiding skeletons in the closet. We hope that the market treats us well and that our cash flow can carry our decision to invest.
The BusinessPortal range of websites is trying to change that (excuse the shameless plug). We want to educate the buyer on what information could inform their decision and thereby attract the right sort of buyers. And we want to show the seller what data they really should be collecting, because it’ll probably be in their businesses best interest anyway.