Thought Piece
Getting good financial information after a merger or an acquisition
A universal but unacknowledged business truth is that mergers and acquisitions lead to accounting chaos. And that inevitably leads to business underperformance.
"The result: information of variable quality, produced at a pace which is too slow to be useful"
"One of the biggest problems non-finance people have is the concept of accruals. Everyone except accountants thinks it means that you just make up the numbers"
"While many finance professionals are excellent at the debits and credits, they are less able to explain what the numbers mean"
It is understandable that when businesses come together, different accounting practices are going to be run in parallel. Often, there are more pressing matters than integrating the different Enterprise Resource Planning (ERP) systems. At the same time, the management of the acquired company can put-up stiff resistance to change. They feel comfortable producing numbers in the same way that they have always done. The result: information of variable quality, produced at a pace which is too slow to be useful.
The wrong information at the wrong time is not the sole preserve of companies involved in M&A. Much of my career has been spent trying to help finance departments talk sensibly to the rest of the business. Finance professionals who are trying to explain numbers to non-finance people must be able to see the numbers from the user's point of view and understand why the accounting information that they produce may not be as meaningful to everyone else as it is to themselves.
One of the biggest problems non-finance people have is the concept of accruals. Everyone except accountants thinks it means that you just make up the numbers. And that perception is sometimes not that far from the truth. While many finance professionals are excellent at the debits and credits, they are less able to explain what the numbers mean. It is a question of recognising individual strengths and weaknesses.
Happily, signs are emerging that companies are finding ways to build better bridges between the finance department and the rest of the organisation. One of the trends we've been seeing — and indeed working with clients to make happen — is the setting-up of Business Performance Teams: financial professionals who know how to work with the rest of the business to drive the commercial agenda. A Business Performance Team helps make sense of the financial data to produce analysis and trends and looks at what drives revenues, profits and cash flows.
Business Performance Teams can make sense of financial data and work with the rest of the business to drive the commercial agenda.
Of course, the Finance Department must produce accurate accounts to satisfy law and compliance but it is no longer acceptable to produce management accounts weeks after the event in the expectation that they are adding value to the business.
At one business we worked with, the commercial and operations teams had been forced to use intuition and experience to assess performance because finance was unable to produce numbers — or at least useful numbers — in time to help them make decisions. By working together on the business and the data the Business Performance Team made a real impact in terms of understanding the business drivers. This fed into more successful planning. For this business, it had a real bottom line impact as they could more accurately plan purchase of stock, capital equipment and other supplies. That improved working capital management and in a capital intensive business, lowered the borrowing requirement.
For this business, it had a real bottom line impact as they could more accurately plan purchase of stock, capital equipment and other supplies.
Today, whether in the aftermath of of a merger or an acquisition or not, finance can go further than simply producing accurate management accounts, it can illuminate the performance of the business. The future lies in financial professionals who can work with the rest of the business and ensure that their numbers make sense and are relevant.
Anthony Brassil