The client was concerned with the lack of profitability in one of its newly acquired business units.
Post-acquisition, the acquired business unit’s financial results were underperforming compared to the client’s expectations. The root cause of underperformance was not apparent because:
- There was no system in place to accurately track and forecast contract costs for the entire contract duration, making it difficult to capture actual margin
The process to capture inter-company activity in financial statements was insufficient, possibly distorting the business unit’s results
- Shared overhead resources were not allocated properly, further distorting operational results for each affected business unit
Within 8 weeks of the project start date, DLC presented recommendations to the Board of Directors. The detailed analysis DLC provided allowed the BOD to make the critical business decision of whether to retain or spin off the business unit.
The DLC Approach
Working alongside the client’s CFO and Project Accountant, the DLC team collected intel to understand current business operation processes in relation to other business units. From this information, the DLC team recommended redesign to policies and procedures that would to bring the business unit to a profitable level operationally and financially.
DLC prepared reports on the historical and projected operating performance of the target business unit to further support recommendations to implement profitability tracking, continuous forecasting, core competencies and business development initiatives.
A number of interviews with leaders of the target business unit and leaders across the client’s additional business units to understand processes, policies and procedures in place as well as how other units generate revenue, direct and indirect expenses.
Design of a comprehensive project profitability tracking tool incorporating margin analysis, billing process, direct expenses and SG&A cost allocations. The analysis included post-audit review tracking to compare realized profitability to the acquisition deal model.
Preparation of pro forma financial statements that included more accurate accounting for overhead allocations and shared resources.
A 5-year pro-forma P&L by product line for the business unit.
Following DLC’s guidance, the client redefined business objectives for the target business unit to clarify territories and relationships with existing business units. Utilizing the 5-year financial forecast model, the client created performance goals to establish the unit’s growth targets.
The pro forma financial statements prepared by DLC consultants reflected positive EBITDA for the final fiscal year, a restatement from previously reported negative results. This restatement enabled management to understand historical cost structures, which allowed the team to re-evaluate the acquired entity’s relationships with the company’s existing business units.
The client implemented DLC’s recommended policies and procedures, with significant changes made to allocation processes. The client was able to better understand the acquired entity’s operating results in relation to existing business units.