If you’re a CFO that has recently listed your company on the Australian Stock Exchange (ASX) or have aspirations to float the business, then getting the right financial reporting software in place early to better prepare for and execute a liquidity event is a must, especially if you’re to ensure you avoid these 4 common mistakes often made.
Mistake 1: Thinking the ASX is an arrival point
For many growing companies, listing on a securities exchange is attractive as it allows them to access capital to take up new opportunities. While boards may see ‘going public’ as the endgame, in reality the decision to list is just the start of a long road. Listings are done best when they are seen as part of the beginning of a much longer process. Many formerly private companies are surprised by the market’s scrutiny after listing, and cultural changes are often needed to properly prepare for the unswerving gaze of markets. This includes learning the language of markets and knowing which questions can be answered and which questions must not. A consideration of the economic and regulatory environment of a listed company should be undertaken and completed as early as possible during the Initial Public Offering (IPO) process.
Listing takes a significant amount of energy, effort and time and can prove to be very demanding on the management of the company. There must still be time to manage the usual affairs of the company, and this should be a factor in setting the timetable for listing. Having a clear strategy is critical as is spending the time to generate interest in your stock, otherwise you could easily fall into the bottom 2000 stocks listed on the ASX.
Mistake 2: Not being prepared to transform
Being ready for an IPO requires planning and often this means a company will need big organisational changes to meet the requirements of being publicly listed. With access to public capital comes the responsibility to be more transparent with shareholders. The expectations for a listed company's continuous and periodic disclosure are higher than for unlisted companies, as set out in the ASX listing rules and Corporations Act.
Financial reporting systems and corporate governance are areas needing review ahead of the company's transformation for listing. Financial reporting should be looked at to ensure the company can meet its obligations and communicate with the market in the way expected for listed companies. Likewise, corporate governance policies should be revised to suit the company's post-listing needs. Planning and thorough due diligence will help ensure the prospectus properly presents the company's business and matters material to investors.
But getting the right systems is not enough. There is also a very human side to listing. The board's composition may need review to ensure the necessary skills and experience to oversee a public company - the market may seek appointment of some independent directors. Does the senior management understand how to operate as a listed company? Training and introducing new people into the company may need to be considered.
It is important for the company's long-term reputation – and that of capital market - that a newly listed company's directors and management are committed to carrying out their role in a way reflecting the market’s expectations.
Transitioning from a private company director with private operations and accounts and a close-knit group of owners to a public, listed company often needs a new way of thinking. Previously, information that may have been a closely-held secret must now be shared and that means some control over the company must be relinquished. Ownership now belongs to a larger group of shareholders with disparate interests.
ASIC has observed that companies which establish appropriate financial reporting systems and corporate governance policies, to which its directors and management adhere, are less likely to become front-page news for the wrong reasons.
Mistake 3: Not Having Your Financial House In Order
IPO’ing means, as a high-growth business, you have a significant communications challenge to ensure that investors understand where the company is at, what its objectives are and how they’re trying to deliver. Companies that list too early without getting their books in order, face the challenge of a misalignment of expectations that private companies don’t have to deal with. This can also produce unnecessary pressure on companies to focus on their share price at the expense of long-term growth. Venture capital funds are usually more interested in a company’s potential revenue growth rate than they are in profit and share price. Twitter, Amazon, Uber and Box are just a sample of the technology giants that have achieved multi-billion dollar valuations without turning a profit.
If you're thinking about an IPO, or even raising capital, potential investors will want clean financials and evidence that there’s a strong process in place for generating financial statements. To list on the ASX the company must provide audited financial statements and reports in accordance with its normal reporting cycle for the last three full financial years. If you’re looking to acquire another entity or have in the last 12 months, then you also need to provide full financial statements of that business for the last two full financial years. Other detail like specifics around working capital, liquidity of assets and net tangible assets also need to be provided, as well as in-depth detail that needs to be included in the prospectus around financial position and performance. If the prospectus contains a statement about a future matter (eg. Future earnings and forecasts) and there are no “reasonable grounds” for making the statement, the statement may be regarded as “misleading” and may give rise to legal action.
Spreadsheets to this end are error-prone and will not stand up to an audit. Purpose-built financial consolidation and reporting applications, such as those provided within Corporate Performance Management (CPM) software suites, are a much better solution. They enable you to collect and consolidate financial results from multiple systems, handle all of the required adjustments, and can generate financial statements with a clean audit trail back to the source figures. While the budgeting and planning software capabilities within cloud-based CPM suites can support the collection of budgets and forecasts from many stakeholders, as well as the rapid consolidation of these plans. Equally important is the ability of cloud-based modeling tools to support “what-if” analysis and long-range planning for various business scenarios.
Having a powerful tool with full documentation of the assumptions behind your plans and forecasts will give potential investors a higher level of confidence, versus a series of complex spreadsheets linked together.
Mistake 4: Underestimating the importance of transparency
Unfortunately sometimes mistakes make their way into financial statements and when they do what happens next can depend on the timing and severity. When a financial statement error is discovered, it should be corrected. In some cases, the correction of an error is made through a restatement, which may lead to questions from investors and other stakeholders. When an error dates from a prior year — or years — how it is corrected can vary, based on the significance of the error to prior year financial statements. All of this can make it difficult for investors to understand the difference and significance of financial restatements. Australia Post is an example here that has come under attack recently about the large number of restatements issued which has created complexity in understanding true performance of its operating businesses.
When a company has gained official listing status, it becomes subject to a much higher level of scrutiny and accountability imposed under the ASX Listing Rules and the Corporations Act. Failure to adhere to continuous and periodic disclosure obligations may result in civil and criminal penalties for the company and its officers. This means anything deemed ‘material’ to effect the price or value of the entity’s securities such as a contract, takeover bid, revisions in financial forecasts etc.
Annual and half year financial reports must be in line with information required by the Corporations Act, the ASX Listing Rules and the ASX Corporate Governance Principles. Required are a statement of comprehensive income (profit and loss statement), a statement of financial position (balance sheet), a statement of cash flows and a statement of retained earnings, all with commentary and any other significant information needed by an investor to make an informed assessment of the entity’s financial performance and financial position. So making sure you have a strong financial reporting system in place is critical, as is communicating those results in the right way. The Social Divide Index reveals that ASX 100 companies are taking to social media to enhance communication and transparency, with the research showing an increasing stakeholder appetite for receiving results-related communication via social media channels.
The ASX has tightened the rules last December so that companies seeking to list must satisfy a tougher Net Tangible Asset test which lifts the bar from $3 million to $4 million or a market capitalisation of $15 million (up from $10 million). They’re also required to have $1.5 million in working capital and conform to a minimum free float quota of 20 percent (the proportion of the company shares actively traded rather than held in a restricted state by insiders). With tougher listing guidelines in place and the obvious rigour required around preparing financial plans, statements and forecasts, getting the right financial reporting tools in place to better prepare for an impending IPO is one step that CFO’s shouldn’t be taking for granted. Take a look and download the Gartner CPM Magic Quadrant reports to learn more.