How to Avoid These Business Valuation Mistakes?
Business valuation is one of the essential processes for all types of companies and businesses in Singapore because the Singapore law makes it compulsory for the companies to provide financial statements and reports on a quarterly or annual basis.
Generally, companies can get through the process of business valuation by relying on accounting firms in Singapore that provide professional accounting and audit services.
However, there are some common mistakes that companies tend to make in business valuation. In this article, you will learn about the top 5 business valuation mistakes and how to avoid them.
These mistakes are typically associated with Discounted Cash Flow to the Firm (DCFF) and multiple business valuation methods.
1. Underreported Assets
A common mistake made in the DCFF method is ignoring the non-operating assets. Non-operating assets mean the assets that do not make any money for the company, like a building that is not being used by the company or some kind of investment that is not generating profits.
However, it is important to add the market value of these assets after adjusting the possible tax impact on the sale of these assets.
2. Lack of Understanding About Taxable Income
As a general rule, you should remember that all of the profits generated by the employees from Singapore employment are considered taxable in Singapore. However, taxability is highly dependent on the nature of the transactions and the kinds of assets you are dealing with.
Companies in Singapore make the mistake of having an insufficient understanding of the variables of different types of taxable income. For instance, bonuses, company director’s charges, and other such transactions are often a cause of confusion among the companies.
Whatever might be the case, it is recommended that you get professional services from an accounting firm in Singapore to ensure you are reporting all of the necessary income.
3. Ignoring Benefits-in-kind
Benefits-in-kind is taxable in the majority of the situations. However, there are some situations in which you can get exemption from tax or concession by contacting the IRAS. Some Singapore companies make the mistake of not valuing and reporting these benefits-in-kind.
For instance, the company might omit the gifts given to the employers on some special occasions. These mistakes of underreporting can be considered penalties by the tax authorities.
4. Unrealistic Projections
The process of business valuation is often derailed due to unrealistic cash flow projections. Cash flow forecasts are considered essential in most companies to make future decisions and investments.
However, such projections often include a lot of errors and inconsistencies that can cause the business valuation to be full of errors too.
There are many different aspects of making unrealistic projections, such as:
- The majority of the companies have an upward bias in their forecasts because it is quite natural to overestimate the growth prospects of a business. However, if the revenue projection is unrealistic, it will adversely impact business valuation.
- Companies often fail to properly calculate their operating expenses, which means that profit margins are also affected. Such errors can be avoided by relying on a suitable financial model that is capable of making calculations as per the type and financial metrics of your business.
- Additional fixed assets are an essential part of business in most growing organizations. Yet, many companies fail to use a valuation model that actually incorporates the metrics associated with various facilities and the distribution of assets. It is important to evaluate the capital expenditure requirements to avoid such problems.
All of these issues can be avoided by getting professional services from accounting firms because they are experienced in dealing with different kinds of businesses and hence can make accurate and realistic projections for your business.
5. Reporting Incorrect Overseas Income
Reporting overseas income is an essential part of the business valuation process. Some companies tend to ignore this type of income because certain income from overseas is not taxable in Singapore.
However, reporting lapses can adversely impact the entire process. A company in Singapore must report and value income from all kinds of assets, including overseas.
In a Nutshell
Other than these five mistakes, a huge mistake that companies in Singapore make is not keeping up with the regulatory changes in the law.
The solution to overcome most of these issues is to be familiar with the Singapore Income Tax Act and business valuation methods so that the company keeps up with the changing landscape.
Accounting firms in Singapore are also capable of providing reliable and efficient business valuation services.
For more information, feel free to get in touch with us.