Is it Time to do Your Own Due Diligence?

Last week I attended Invest MK, where businesses pitch for funding ranging from a few thousand pounds to half a million or more. How these business owners present their business, the information they provide and the ‘problems’ they are solving or the innovations they have developed I find fascinating. Whilst I sometimes wish they had more time to share the information sometimes you simply wished they actually shared some information.

Before the pitches there was great explanation on how due diligence is undertaken as part of an acquisition and/or investment process. And it got me thinking in so much as many businesses will have an exit strategy, at some point some will seek funding and all want to be the best they can. And so undertaking a due diligence exercise on a regular basis, say as part of the annual planning and review would support all of those.

Essentially everyone who works in the business is an investor, they are investing part of themselves in the success of the business even if they are being paid a salary/wage. And wouldn’t you want to know that something you’ve invested in stands up to some fairly simple tests?

So what might you consider, where should a business demonstrate that its being diligent?

  • Cash flow – we all know that cash is king and even the healthiest order book won’t sustain a business if the cash isn’t being received. So when was the last time you seriously looked at cash flow for the current year and the next couple of years? How are late payers being managed? How much debt really exists?
  • Financial forecasts – what’s the burn rate? How long will cash last? What’s needed to support to the next stage of growth?
  • Financial controls – are these adhered to all the time? Are there appropriate terms and conditions in place for your clients and your suppliers, who is signing off expenditure and is ROI being measured?
  • What about the management team or the people in general? Are they delivering to the best of their ability, are they appropriately incentivised and are they being motivated? Are there succession plans in place, what would the impact be if a key person left the business? Are there any skills gaps?
  • If you were to do a SWOT analysis what would this show? What are the things that will stilt growth and what are the things that will support it? How can you put the changes in place to reduce the risk of growth being impacted and what can you do to unlock even more potential to support growth?
And no, you don’t have to engage someone to do it for you but you might just choose to work with someone so that you are truly challenged and a good starting point would be your accountant perhaps in tandem with a business coach.