In my area of expertise (business advisory / restructuring), the notion of a business review typically comes on to my radar in the following scenarios:
• Stress / distress – A lender to a company has become concerned about the financial position of its client and wants an independent business review (“IBR”) to help them understand - (a) The underlying issues that have led to the business’ underperformance (b) The current (true) financial position (c) The forecast short term cash position (d) Options available to the lender and the board of directors; or
• Refinancing – A corporate business has requested support in finding a new lender to refinance its existing borrowing facilities. To facilitate this process, a Management information pack containing an element of a business review that “tells the story” of the business’ evolution (history, key events, product lines, customers, profitability, growth prospects etc.) will often be prepared for the ensuing lender road shows.
I have, however, always believed a business review is an essential management exercise which businesses (regardless of size) would significantly benefit from conducting more frequently.
At present many SMEs will probably only consider doing a business review because they have to, or as part of their annual statutory accounts (if they prepare these). In my opinion this is a mistake for many businesses.
From my experience, a periodic review of a business conducted regularly, provides the following internal tangible benefits:
1. Visibility of the key factors that have driven historic performance so that remedial action can start to be taken where necessary to address short comings; and where performance is on track, Management can do more of what is working;
2. Ability to put the current year to date financial position in the proper context by evaluating the following – (historic performance vs plan; trending/trajectory of historic results; how the market, competitive and regulatory environment is changing; whether the business has sufficient cash resources to achieve medium and long term objectives, as well as taking advantage of any short term opportunities)
3. Ability to more accurately re-forecast future financial projections (including potential revisions to the existing business plan) having regard to points 1 and 2 above.
The three points represent the typical phases of focus when I’m undertaking an IBR together with a stakeholder option analysis at the end.
There are also wider external benefits to be gained by making this kind of review part of a company’s financial management process.
1. Being able to bring to bear the key findings from the business review in discussions with the company’s key stakeholders, undoubtedly enhances the credibility of a management team. Greater credibility will mean easier discussions with e.g. lenders when it comes to asking for increased borrowing facilities to perhaps fund an acquisition, or allows more benefit of doubt during a down turn in performance.
2. But more crucially in my opinion, a regular review of a business that answers the following three key questions - (a) Where are we today (sales growth, profitability, cash flow, financial position)? (b) How did we get here (historic performance over say past 2- 3 years and trend analysis) and (c) Where are we headed (re-forecast, re-evaluation of business plan, change of strategy)? - will enable a Management team to be consistently on the “front foot” and the ones driving the agenda. Otherwise in times of business stress or distress, stakeholders facing a potential financial loss will seek to take control the agenda if they believe that Management do not have a full grasp of the key issues.
My parting message to SME Finance Directors, CFOs and CEOs:
Do not wait for an external party to prompt you into thinking about the components of the key three questions of –
• Where are we today?
• How did we get here?
• Where are we going?
Knowing the detailed answer to these questions will go a long way to keeping you in charge of your destiny.
Should you wish to discuss any of the points above or explore how Quantuma LLP can potentially support your business please feel free to contact me.
Director – Advisory & Restructuring
Mobile: +44 (0)7469859111