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In the same way humans look out and take care for one's personal health by having an annual health check-up done; it is important to have a periodic health check-up of your business too! The health check-ups of the business from the various aspects becomes especially important for the overall health of the business operations of the entity. Following are the various aspects of health check-ups:
The section below provides a detailed reasoning for conducting a Master health checkup for your Business. Although the reasoning are by no means complete; however it does provide a starting point to determine what types of opportunities exist for improvement in your company. It helps organizations to adapt to changing business environments, redefine corporate priorities and channelize the company's resources into value-maximizing avenues.
Typically, Financial Statements of a legal entity by their very nature are abstractions. Abstraction in this context is defined moving to another level leaving certain characteristics out. When we roll-up financial statements throughout the organization, that is exactly what we are doing: compiling information at a higher and higher level until it is almost unrecognizable to most managers and employees. While auditing the financial statements, the emphasis tends to be on professional judgement, focusing on a reasonable assurance giving "True and Fair" view on the state of affairs of the entity with some degree of materiality.
Further, Tangible assets no longer serve as the primary driver of enterprise value. It is the employee knowledge, customer relationships, culture of innovation and development– in other words; the intangible assets that create the bulk of value provided by any organization. Often, such intangible assets unfortunately do not form part of the Balance Sheet numbers of an entity. In a health checkup we evaluate every material aspect of the business operations of the entity where problems and root causes of such problems, valuing these operations, are magnified. Placing the process before numbers forms the basis of such health checks.
In a growing number of business and people, work flows horizontally across the enterprise while financial measures are particularly vertical in nature. A department's numbers are rolled into a business unit and business units are consolidated into massive corporate heap of digits. This reporting system does little help to encourage cross-functional work patterns. In a health checkup we evaluate every segment of the business, in detail!
Financial measures offer limited view of the future. A history of strong financial results is not indicative of future liabilities that may have not been identified timely by the company. Today, the need of the hour is that the organization's processes have to be dynamic and responsive to the emerging trade scenario to identify risks. Business operations have become more complicated with ever-expanding regulations. In this scenario, health check-ups are defensive in nature; in that they identify risks, which, if not identified early, can lead to serious harm to the businesses. Such defensive acts can help in setting up preventive controls by the entity to avoid such future business risks. Unfortunately, because many of the organizations do not understand their legal obligations, they may continue for years violating important regulations. This can result in serious and sometimes fatal legal and financial consequences in terms of delays and penalties. Health check-ups warrants that the activities of the business do not infringe any third-party rights, and that no other parties are infringing any of the company's rights.
In addition to minimizing risks to future operations, master health check-ups can also help you identify and exploit wonderful opportunities. Periodic check-ups should be part of any long-term exit-strategy. Such approach creates value and sustainability and make the business attractive to a future purchaser.
Budgets are a detailed articulation of the priorities of the enterprise for the next fiscal year. If the budget is not linked to some form of strategic plan and goals, then it is nothing less than shooting in the dark and wasting precious resources in the process. In a health checkup we review the process of budget preparation and link it to the strategy and business goals of the company, in detail!
In sum and substance, we can say that a successful health check is the key to an eventual investment. Adding value does not happen overnight, it is a continuous process taking time and attention to planning. Organizations should view the health checkup as a worthwhile and important exercise. It will lead the organizations and entities to achieve new opportunities and unearth the hidden potentials of its businesses!
Newsletter India
Martin Wörlein
Partner, Head of India practice
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Rödl & Partner in India
