5 rules of financial management that will increase the value of your ICT business
Article updated May 2024
Whilst a trade buyer's desire to acquire your ICT business will be driven by the strength of your service contracts and operational prowess, their valuation will always be based on your financial performance.
It is therefore paramount to provide them clear financial information so that they can make their best offer.
In this article we show 5 ways that you can do just that.
1. Forecast your next year's revenue and profit
A buyer will almost always argue the price based on the performance of your business to-date rather than the future they are buying.
However, ours and your task is to sell them your business on its strength as an ongoing concern and the often significant uplift in profitability through putting two companies together.
If you can provide a 12 month forecast backed-up by a list of client contracts and justifications for the remaining assumptions, this will draw the buyer's attention to the future revenue and potential for growth.
Valuations for ICT companies which derive a significant (over 70%) and growing portion of revenue from service contracts, will typically be judged on the current run-rate, rather than previous years.
2. Produce monthly management accounts
Put in place a management accounting system that can tell you month by month the revenue, costs and profits from each client and revenue stream. This will add credibility to your forecast for the following year.
A clear presentation will show buyers that the business is under control. It will also add credibility to your forecast for the following year. When doing this, it’s best to use a recognised accounting system.
3. Know and be able to show where your revenue is derived from
Divide out your revenue by service provided and by client.
You need to be able to prove that your business is not over dependent on one client. Looking back to the multiple of revenues valuation method, set-up your management account system to monitor the following revenue streams:
- IT / telecoms systems support contracts
- Managed services (email, back-up etc) - provided in-house
- Managed services (email, back-up etc) - outsourced
- Consultancy and installation projects
- Telecoms billing (Commission based)
- Telecoms billing (Re-sales based)
- Hardware and software re-sales
4. Ensure your clients settle payments on time
Ensure your clients are up to date with their payments and continue to pay within your invoice payment terms. Buyers will not want to take on clients with a history of late payment.
For regular service contract payments, set-up a Direct Debit facility with your clients. If possible, invoice your regular monthly services in advance to maximise your cash flow.
5. Make your accounts transparent
Maximise profitability, ensure all revenue is recorded, reduce non-core expenditure, and remove private assets.
The fewer adjustments that you need to make to assess the total earnings that a buyer could achieve, the more credible any valuation of your business will be.
Good information and accounts will always give you a competitive advantage in selling your business.
FAQs
How scalable are these financial management techniques for larger ICT businesses or those aiming for rapid growth?
The financial management techniques we outlined are generally scalable but may require adaptation as the company grows.
For example, larger businesses or those experiencing rapid growth might need more sophisticated forecasting tools and more detailed financial modelling to manage complexity and increased volume of transactions.
Integration of advanced financial software and possibly a dedicated financial management team becomes essential to handle the broader scope of operations and maintain accuracy in financial reporting. These adaptations ensure that the foundational principles of transparency and accountability remain effective at scale.
What are the potential operational challenges a business might face when implementing these financial management rules, particularly the rule about ensuring timely payments from clients?
Firstly, it may require stricter credit control policies, which could strain customer relationships, especially if stringent payment terms are enforced.
Secondly, there is the need for an efficient invoicing system to track and manage payments effectively. This can demand both initial financial investment and ongoing maintenance to handle the increased administrative workload.
Additionally, there could be legal and regulatory considerations when dealing with international clients, requiring compliance with various financial laws and transaction regulations.
How can modern financial technologies (fintech) be integrated into these financial management strategies to further enhance efficiency and transparency? Are there specific tools or software that are particularly effective in industries like ICT?
Automated invoicing and payment systems can streamline processes, reduce errors, and ensure faster client payments.
Artificial intelligence and machine learning can further refine financial forecasting and risk assessment.
When it comes to software solutions, the likes of QuickBooks, Xero, and SAP are widely recognised for their effectiveness in managing complex financial tasks within ICT and other industries.
