Numbers if don’t match there is a story to be uncovered.
Other key number to look at other than financials is the regular MIS in form of stock, book debt statement and creditors statement.
Listing some common practises which helped understand the business better and identify signs which helped decision-
- Compare the difference between the year-end inventory levels as per stock statement and balance sheet & understand the reason for major variance therein. Normally for the year end month ie March the statement submitted is not of Mar31 but Mar 28 or 30.
- Ageing of the components (stock, debtors, creditors) is not seen in majority of statements but if there is a spike or levels which as per industry/ business type appears higher understand why ?
- There was an instance when on comparison of receivables over 6 month period revealed that similar amount was appearing over the period and bucketing was shifting back and forth. On further discussion it was found that there were serious receivable issues being faced by the company.
- Look for related party names in receivables & creditors list. Creditors list is not regularly shared but if levels are sizeable insist and see how it is spread out.
- Businesses where inventory is the key component look at the quantitative numbers, ageing and composition.
- Quantitative nos will help you arrive at the average cost per unit which for a commonly available item can be compared with market price. A customer was showing his closing at quite a higher amount as compared to avg price. On further enquiry it was found that the customer was also making two different stock statements- one for bank and other which was actual.
- Ageing of inventory is normally not given but esp for businesses risking old inventory like automobiles check the ageing from invoice. There was once can interesting instance of same invoice number appearing for two different dates. See the quantum of such instances and understand the reason for same. Subsequently it was found that the client was facing serious challenges on old inventory and was trying to sell his dealership and assets to tide the situation.
- Look at what exactly are they carrying in inventory. There was this other instance that the entity was showing jewellery and land bank in inventory while the core business inventory was not substantial. So overall inventory number was looking fine but the composition of it was not what the business was into. Later the business was found to have diverted funds and filed for debt restructuring.
Note: These are personal views and in no way represent the organization(s) I am (was) part of.