Common characteristics of privately held businesses include:
- Annual statutory accounts are prepared by professional accountants primarily for compliance reasons e.g. reporting to regulatory bodies and for taxation purposes.
These reports are prepared using generally accepted accounting principles and are
prepared on a Net Profit Before Tax (NPBT) or ‘Earnings’ basis.
- NPBT is kept to a minimum for tax planning purposes
- The accounts are generally not audited.
- Taxation reporting and treatments depend on the business structure.
Because of these market practices the reported NPBT or ‘Earnings’ is restated to work out
maintainable earnings available to the owner. These adjustments include:
- Eliminating financing costs and costs of capital
- Adjustments aimed at determining the true earnings of the business operations before the owner decides how these earnings are to be spent or invested, such as:
- Bringing to account items of income or expenditure which have not been included in the financial reports of the business
- adjusting or eliminating non recurring, extraordinary, unusual or personal items of income or expenditure including the owners’ compensation
- adjusting or eliminating items of income or expenditure not directly related to thenormal trading activities of the business
- eliminating expenses to establish the business on a totally unencumbered basis
These adjustments are important in enabling you to calculate a Return on Investment for the business.