Business Management Evaluation

What is a business management evaluation?

Business management evaluation (Betriebswirtschaftliche Auswertung, BWA) refers to a short overview, generated from the ongoing financial accounting, of revenue, costs and result for a month and for the months accumulated since the start of the year. It is usually produced by the tax adviser together with the monthly bookkeeping and is not required by law. There is no fixed English term for it; the closest equivalent is monthly management accounts.

It relates to the annual financial statements as the projection on election night relates to the official final result: the direction is usually right, but the exact figures still change. In Germany, the evaluation formats of DATEV are widespread. DATEV is a cooperative IT service provider whose software many tax advisory firms use. Its standard evaluation is the common format for in-year figures at banks. Banks, funding institutions and investors use the BWA to track developments since the last annual financial statements. It is requested during credit assessment, during the term of a loan, and in funding rounds and company sales.

Structure of the BWA: the short-term income statement

The core of the DATEV standard BWA (BWA form 01) is the short-term income statement (Kurzfristige Erfolgsrechnung). It leads step by step from revenue to the preliminary result:

1. Revenue, changes in inventories (increases or decreases in finished and unfinished goods and services) and capitalised own work (self-created assets, such as in-house software) give the total output.
2. After deducting the purchase of materials and goods, including purchased services, the gross profit remains.
3. Adding other operating income gives the operating gross profit.
4. Deducting the cost categories, such as personnel, premises, vehicle, advertising and travel costs, depreciation and other costs, gives the operating result.
5. Non-operating expenses and income, including interest, lead to the result before taxes.
6. After taxes on income and earnings, where booked, the preliminary result is reached.

The reporting month and the figures accumulated since the start of the year are shown, each also as a share of total output and of total costs. Supplementary evaluations such as a prior-year comparison, a statement of changes in the balance sheet (Bewegungsbilanz) and static liquidity are produced from the same bookings. Where plan figures are stored, a comparison with the plan is added, which DATEV calls a target-actual comparison (Soll-Ist-Vergleich); in substance it is a budget-versus-actual comparison. Which accounts feed into which line is fixed by assignment and can be adjusted for the individual company.

Informative value and limits

The BWA quickly shows how revenue, gross profit and the large cost blocks develop from month to month. However, it is a preliminary calculation based on the bookings made so far. It often lacks the accruals and deferrals that only the annual financial statements book in full: depreciation, changes in inventories and unfinished services, provisions for special payments, holiday and closing costs, and income taxes. Revenue from annual contracts often appears in the month of the invoice instead of being spread over the term.

If the bookkeeping is behind, entire stacks of receipts may even be missing. The preliminary result therefore regularly deviates from the later annual result, often considerably. The BWA becomes informative when it rests on a monthly closing with the main accruals and deferrals, when the account assignment suits the business model and when plan figures are stored. It is not sufficient for queries about individual items; for those, the trial balance (Summen- und Saldenliste) is used.

The BWA at banks and investors

Above a certain loan amount, credit institutions must have the economic circumstances of the borrower disclosed to them, in particular by submission of the annual financial statements (Section 18 of the German Banking Act, Kreditwesengesetz, KWG). During the year, they regularly require the BWA and the trial balance for this purpose, monthly or quarterly. They use these to measure debt service capacity, that is, the ability to pay interest and repayments from ongoing business. With the same figures, they monitor the financial ratios agreed in the loan agreement (covenants).

Investors and buyers request the BWA for the current year and often for prior years, place it alongside the plan and the pitch deck, and ask for a reconciliation to the annual financial statements. In financial due diligence, the BWA together with the trial balance is among the standard documents. There it is the starting point; the analysis itself works at account level. As a rule of thumb, a good BWA is available by the middle of the following month. Further quality features are monthly accruals and deferrals, an account assignment that remains stable over the years and small deviations from the annual financial statements.

Worked example: reading a BWA and adjusting the preliminary result

Short-term income statement of a software company for March, amounts in EUR:

• Revenue 400,000, no changes in inventories: total output 400,000
• Purchase of materials and goods for hosting and purchased development services 60,000: gross profit 340,000, which is 85% of total output
• Other operating income 5,000: operating gross profit 345,000
• Cost categories: personnel costs 230,000 (57.5% of total output), premises costs 18,000, advertising and travel costs 25,000, depreciation 0, other costs 32,000; total costs 305,000
• Operating result: 345,000 minus 305,000 = 40,000
• Interest expense 2,000, no income taxes booked: preliminary result 38,000

The company books depreciation only at year-end; EUR 60,000 per year is expected. For March, the pro-rata share is EUR 5,000. If the annual special payments of EUR 96,000 are also included pro rata at EUR 8,000, the monthly result falls from EUR 38,000 to EUR 25,000. Anyone who extrapolates the preliminary result to twelve months arrives at EUR 456,000, and with the two corrections at EUR 300,000. The unadjusted BWA thus overstates the annual result by EUR 156,000, or 52%. Only the correction for special payments affects EBITDA (earnings before interest, taxes, depreciation and amortisation), because depreciation is not deducted in it anyway.

Distinction: BWA, trial balance, monthly closing and income statement

• Trial balance: the complete list of accounts without consolidation. The BWA condenses its income accounts into a few lines.
• Monthly closing: the process that reconciles and accrues bookings. The BWA is a reporting format that only becomes reliable on this basis.
• Income statement (Gewinn- und Verlustrechnung, GuV): the statutory layout scheme of the annual financial statements under Section 275 of the German Commercial Code (Handelsgesetzbuch, HGB). The BWA resembles the nature of expense method but groups by its own rules, for example with gross profit and cost categories.

Common mistakes

• Reading the preliminary result as the actual result. Without accruals and deferrals, every month looks better than the year that the annual financial statements later show.
• Late evaluation. A BWA that is only available at the end of the following month is hardly suitable for management any more and delays every financing process.
• Account assignment not adjusted. If significant costs end up under other costs, the BWA does not show the cost structure of the business model.
• One-off amounts in the month of booking. Annual bonuses or annually billed licences distort the month in which they are booked if they are not spread.
• Different versions in circulation. If the bank and investors receive differing versions of the same BWA, queries arise that undermine confidence in all the figures.

Frequently asked questions

Is a BWA mandatory?

No. No law requires it, neither for a GmbH (German limited liability company) nor for small businesses or small traders. What is required is the annual financial statements and, for small businesses without a bookkeeping obligation, the simple income and expenditure account (Einnahmen-Überschuss-Rechnung), and the BWA replaces neither of them. Banks and investors nevertheless often demand it, usually on the basis of loan or investment agreements.

Why does the annual result deviate from the BWA result accumulated to date?

Because depreciation, provisions, changes in inventories, prepaid and deferred items and taxes are only booked in full in the annual financial statements. The more of these are already recorded monthly, the smaller the deviation.

Does the gross profit in the BWA correspond to the gross margin that investors look at?

As a rule, no. The gross profit in the BWA deducts only the cost of materials and goods and purchased services. For software companies, investors often include personnel for operations and customer support in the cost of generating revenue, which is why the gross margin comes out lower.

Which BWA do banks require?

Usually the current BWA, that is, the one for the most recently booked month, with a prior-year comparison and the trial balance, monthly or quarterly depending on the loan agreement. For new applications, the latest annual financial statements are added.

Can a BWA be produced in-house?

Yes. Anyone who does their own bookkeeping generates the BWA from the booked accounts using the accounting software; common programs offer a dedicated evaluation for this. A template rebuilt in Excel without a connection to the bookkeeping, on the other hand, rarely convinces banks and investors, because its lines cannot be reconciled with the trial balance.

The Roemer Capital view

The current BWA are among the documents that we retrieve directly from the tax adviser at the start of an engagement, on the basis of a tax adviser power of attorney. We place them alongside the plan and the pitch deck and check which accruals and deferrals are missing before a bank or an investor takes the preliminary result for the actual one.

Where we take on the finance function for a limited period as a fractional CFO, we compare the BWA with the plan figures every month and explain the deviations in a few sentences. Banks, investors and prospective buyers thus receive the same figure with the same explanation, and queries can be answered without first having to request documents.