Things to keep in mind during due diligence

The job of accountants is to make sure that what is in the account reflects the cash flow and capital a client possess. This presents unique challenges when it comes time for Due Diligence when a business is being bought, sold or refinanced. Whether you are an accountant or an individual, there are 5 things you should keep in mind during this crucial period of time:

  1. Accounting Policy Adjustments – In order to keep up with the eb and flow of policies and new waves of technology, many businesses will adjust the way they account for certain items. Many will choose to pay off large purchases in one month’s time instead of paying it out in payments. This directly affects how accounts are adjusted and the steps necessary to do so.
  2. The rate of customer turnover – Another extremely important area of business for your client is their customer turnover rate. In order to gain the full picture of how quickly a company is losing clients or gaining them, you must go back over the course of several years to come up with an average. This average should set the future standard of the company, and if and when a business falls below this rate an alert must be sent out to the business and adjustments must be made to expenditures.
  3. Their cash conversion rate – The goal of any company is to significantly increase their cash flow rate over the course of time. However, some businesses fail to see such an increase in cash flow. As an accountant, it is your job to determine where that cash is going and how adjustments can be made to increase the rate of cash conversion in the future.
  4. Keeping up with trends – Working with numbers gives you a unique perspective on predicting the future and analysing where a company currently stands. When a business shows a trend in an increasing profit margin then it is obvious they are a healthy, thriving company who will be successful in the future. However, declining margins mean the opposite and are a cause for concern.
  5. Working Capital schemes – During an acquisition, working capital schemes are very common. Many businesses will attempt to stretch their working capital to its breaking point to get the most out of their investment. This may include, but is not limited to, making clients pay up sooner than an agreed upon deadline, refusing to pay any inventory suppliers or by selling off stock.

Due diligence is an important part of any transaction process and it is important that a client is properly advised to protect their interests during a sale or purchase. Insight Accountants have substantial experience in providing due diligence support and advice to clients during these processes.