Saturday, November 14, 2009

Sound Financial Planning For Public Companies

The Importance of Sound Financial Planning When Becoming a Public Company

When the directors of a given company wish to go in a new strategic direction to provide new services and products, they will assess if the company has the resources to put into practice and maintain the new initiative; it might include such tactics as how risk and earnings are distributed between subsidiaries and locations.
The study might include satisfactory parameters for non-production items and economic scenarios. Of course, detailed cash flow predictions well into the future with contingency plans and other scenarios are a must. Although this a basic step, most small private companies and private entrepreneurs that want to go public may not be familiarized with the degree of financial oversight that public companies use on an ongoing basis.

Market analysts and shareholders are accustomed to being furnished with regular quarterly and annual financial reporting which documents and validates the sound financial leadership of the company they are reviewing or supporting, through stock or debt contributions. Additional federal reporting standards enforced by the Securities and Exchange Commission (SEC) and the SEC and the Public Company Accounting Oversight Board (PCAOB), are meant to further protect investors and the US public in general, from the impact of flawed or unethical business financial management. Enron, still fresh in many memories, is one of the best-known US harbingers of the negative consequences of overly inflated valuation coupled with audit failures to adequately scrutinize cash flows. Enron was one of several industry leaders which relied on market confidence, reputation and equity valuation - fooling top analyst and audit firms - while ignoring the reality of corporate cash flows and the importance of cash equity. Stock valuation and good will do not pay corporate salaries or operating expenses. Repeatedly, the US market has had to re-learn this lesson.

Understandably, post-Enron market and other capital funding for public companies in the US has been extremely difficult to obtain, and public and lender confidence is only slowly returning. This lack of confidence has made it even more advantageous for private companies to go public, The importance of sound financial management and leadership - sound P&L and balance sheet review and oversight - is critical not just to that company's profits, but to thousands of families and retirees around the country, whether they are relying on company benefits, or on a sound economy that is supported by each individual company's performance.

Private companies are accustomed, in many cases, to operating independently and making financial decisions without outsider oversight or input. Many private companies utilize only limited outside input or financial commentary -- typically engaging a public accountant or CPA for quick review, to complete tax and/or payroll filings -- with limited thought to actual cash flow forecasting or realistic revenue projections and P&L analysis. It is not unusual in the private company world to see many smaller firms operating without any fixed budget, with company ownership relying solely on the revenue side of the financial equation; focusing solely on revenue projections (sometimes without true profit analysis); operating without internal audit controls, without real-time budget checks and balances based on cash flow forecasts; without real-time adjustments to future financial forecasts, to adjust to market or environmental changes such as product price increases, economic impacts to customer demand, workers compensation claims, unexpected losses, or other real-world events. Many private businesses, as public accountants can attest, operate without either the 1-year or 5-year budget and cash flow forecasts which public companies or corporations routinely utilize.

When a business seeks to go public, utilizing a typical time-to-market time frame of 4-6 months, private companies will be well-rewarded to invest focus and resources on an initial detailed audit and financial plan. This should include meticulous cash flow forecasting, historical and forward-looking P&L projections, financial contingency plans based on 2-3 initial offering / market entry scenarios ("what if" budget and scenario analysis and projections): both to satisfy federal regulatory and exchange listing requirements - if applicable, depending on the exchange listing sought - and to present as complete a financial picture as possible to prospective investors and capital funding sources. This initial exercise should also provide an honest and realistic projection for company ownership, of the impact of going public on company growth, revenues, and cash flows.


Many private company owners approach the go public process with a general expectation or awareness of the many benefits of being a publicly traded company -- which typically include enhanced visibility, increased company valuation and credibility, etc -- but with only a vague idea of market strategy, or detailed cash flow predictions. Cash flow forecasting is particularly difficult for start-up companies, as they may lack the historical expenditure perspective to accurately anticipate costs and revenues. This level of financial detail - overhead, true cost of goods, market or product differentiation, and contingency strategies - is typically the calibre of information investors or lenders will demand before funding, however.

Private company subsidiaries or product lines may be accustomed to being carried or subsidized by a parent company or other product lines, without real-time cash flow analysis, or without a true financial model of cost of goods sold. When money runs out in one product line, the company may be accustomed to borrowing from other product lines, without a full appreciation of the level or scope of subsidization. While it may be acceptable to apply this same strategy as a private company moves into the public arena, public companies will be required to more thoroughly identify, justify, and forecast such areas, to meet regulatory and investor requirements. Private owners typically have only one chance to impress potential investors, or analysts, or potential shareholders.

While regulatory and compliance requirements vary based on company longevity, revenue volume, and placement sought, the more complete the audit and financial reporting a company is able to furnish up front, the better.


PCAOB (Public Company Accounting Oversight Board): A non-profit private US entity, created by the Sarbanes-Oxley Act of 2002 (SOX), formed to protect investors (and by extension, the general public), from false financial disclosures or inaccurate financial reporting. This entity was created in response to the market downturn and general fear response which began with the economic impact of Sept. 11, 2001; was fueled by inflated and over-emphasized ".com" filings and over-inflated equity valuations among larger traditional firms; and which played out through the spectacular market failings of corporate giants such as Enron, WorldCom, Pacific Gas & Electric, Tyco, US Airways, and other companies -- the loss of USD billions from the US economy.

Regulation D (Reg D): The SEC exemption clause which allows private companies to go public while avoiding reporting and financial filing requirements, based on company valuation and other criteria. For more on Reg D exemptions please see:

SEC (Securities & Exchange Commission): The SEC is a US federal agency created in 1934, to protect investors from malfeasance or fraudulent financial reporting by US businesses, after a period of false confidence, unregulated banking practices, and over-inflated stock valuations triggered the market crash of the Great Depression. Public companies are required to file quarterly, annual, and other reports and company statements with the SEC, which private companies are not required to furnish. Exemptions are granted to companies, US or foreign, meeting certain SEC criteria.

Public companies typically utilize either equity or debt financing or securities trading:

• Equity Financing:
Companies sell public shares in company equity, with valuations based on future earnings and profit projections, as well as existing equity.

• Debt Financing:
Companies sell debt instruments such as short or long-term bonds, contracts or other instruments.

Federal law requires that all sales of securities be either registered with the SEC, or meet an exemption. Reg D under the Securities and Exchange Act of 1933 allows companies meeting certain categories of exemptions to be excluded from SEC financial reporting requirements, and to sell stock without this regulatory burden.