August 12, 2010

Reason for the loss

Most of the conventional methods for evaluating companies are applied by taking into account your profit of the previous year. This profit figure multiplied by a coefficient, which is determined in the financial world, plays the main role in the evaluation of your company. Multiplying a negative number by a positive coefficient still gives a negative number. The conventional evaluation methods work against you if your company showed a loss instead of a profit figure.

When these calculations are made, it is assumed that profit is an inherent function of the company. How would we explain the following situation then? Two companies are working in the same country with the same machinery and with similar employees and while one of them is making a profit, the other is showing a loss in its operations. We should really ask, what differentiates these two companies from each other. The answer is clear: the management. When we talk about the management in the SME’s, then we are usually talking about the owners of these companies.

Every day we all make many wrong decisions. Usually these wrong decisions don’t hinder the progress of the company much. However, some of them show their effect in the balance sheet of the company at the end of the year. If you had accrued debts in terms of US Dollars instead of Euros, then your profit/loss statement will look different from the one if you had your debts in Euros. This decision was made by the executive shareholders. A decision that could have been thought to be correct 6 months ago may now seem to be wrong.

When we take a company to the market, we consider all of the aforementioned reasoning. Before we dwell on the profit or loss of the company, we try to understand whether or not the shareholders have a grip on their business. If the company is making a loss, we try to find out the decisions of the shareholders which led to this outcome. If the businessmen accept that their decisions were faulty and know the ways to remedy this situation, then it doesn’t matter much for us that the company has made a loss.

It is possible to see in many of our projects that the shares of the company were acquired with a high value even though the company had shown a loss in the previous year. The prospective partner is interested in the profits to be made in the future more than the past losses.

Leave a comment

Your email address will not be published. Required fields are marked *