Private Equity Financial Analysis: Attention to Detail
With private equity firms looking to stabilise their investees, they should be spending an inordinate amount of time on financial analysis. This is more than just looking for ways to keep costs down; it’s about understanding performance for each segment of the business. This granular approach allows you to attack problems at their source (and with a more surgical solution), rather than just applying blanket edicts to the entire business.
When I talk about all levels of performance for each segment, I’m not just referring to customary segments such as business units. I’m talking each function, region, sales team, product, service and account manager. The purpose here is to understand revenue and profitability for each segment and understand how the latest economic conditions are affecting the investee. This is real private equity financial analysis.
This may sound like private equity financial analysis 101, but the fact is that the majority of businesses don’t spend adequate time on this type of differential and detailed analysis. Anecdotal evidence suggests that businesses are finding their problems more complex than just decreasing sales. Some businesses are actually reporting higher revenues, but flagrant inefficiencies due to the self-perpetuating media coverage of the faltering economy are dragging them down. Remember that cultural issues and lower morale can be the cause of just as many issues as external factors.
So without trying to save the world overnight, all I’m suggesting is to break down your revenue, gross profit, operational expenditure, capital expenditure and margins by the aforementioned segments. Find the underlying cause of any issues and attack them with precision. Be mindful that this “downturn” is creating complex problems that require rigorous private equity financial analysis. This may be analysis 101, but a reminder can’t hurt.
