As a follow on to the blog to Skeleton Hunting, here are some key things that a buyer may look at when looking through your P&L:
Common P&L Irregularities to Watch Out For:
- Revenue Recognition Issues: Inconsistent or premature recognition of revenue can distort financial performance, making the business look better than it is.
- One-Time Gains or Losses: Non-recurring items should be clearly identified; otherwise, they can give a misleading picture of ongoing profitability.
- Misclassification of Expenses: Incorrectly categorizing expenses between COGS and operating expenses can distort margins and overall profitability.
- Fluctuations in Operating Costs: Unexplained changes in costs, such as payroll or rent, can indicate poor financial management or hidden issues.
- Inventory Manipulation: Overstating inventory to reduce COGS or failing to write down obsolete inventory can inflate profits.
- Changes in Accounting Methods: Switching accounting methods without clear reasoning can obscure the true financial picture.
- Aging Receivables: Large overdue receivables may suggest overstated sales or collection problems, indicating potential cash flow issues.
- Hidden Liabilities: Off-balance-sheet financing or undisclosed debt can affect the company’s financial stability and future cash flow.
- Unstable Profit Margins: Fluctuations in profit margins without a clear cause can point to inconsistent cost management or revenue recognition issues.
Want some help looking at your books and understanding how a buyer would view things? Reach out!
