Why is business goodwill important for SMEs?
- July 19, 2021
- Posted by: axiom_admin
Goodwill is the established reputation of the business. Goodwill is a saleable but intangible asset built with unaccounted efforts over the years with
# promotion which is a heavy and continuous expenditure
# by creating and maintaining relationships with customers and suppliers
# providing goods and services of good quality
# sustaining quality and conduct of management and employees.
Corporate image and proper location enhances the worth of corporate identity which falls under Goodwill. Its value is realized at the time of the sale of the business, not in the account books. When the market capitalization of the firm exceeds the firm’s net worth, it can be attributed to business Goodwill.
WHAT CREATES BUSINESS GOODWILL
Everything comes with a price tag, so does “GOODWILL”. It is earned-bestowed upon a company by the consumers, employees, stakeholders. Doing good business creates goodwill. Being fair, reasonable in actions, providing good quality product and delivers on promise to the vendors, clients and other stakeholders are the steps towards building Goodwill.
# Apart from this , companies engage in programs that are designed to enhance goodwill :helping for a good cause buys good press( strategic philanthropy).You’ll often see offers that mentions a certain percentage going to X charity. This creates a win-win situation.
# Now a days , the word that is in vogue is “transparent”. A brand that is completely open and transparent is a must . Be honest with your audience in case of a goof up. Audience would appreciate you for being upfront with them.
# Being consistent is an absolute demand of the market when it comes to your brand or business. Confidence with customers is based upon consistency. Be sure to focus on being consistent and reliable.
# A truly happy customer with product or service will remain loyal throughout. Make them feel better through email, blog post, video, product or by any other means you can think of. Don’t leave them satisfied….leave them blown away.
# Maintain a strong relationship with your audience. The relationship with your target audience either grows stronger or weakens with every interaction you have with them.. Provide more value for your audience , it will strengthen your bond with them. Your audience needs to be cared immensely.
# The consumers will coming back when they get more value from your product than they have paid for . Hence, when consumers feel that they have been treated right and u have exceeded their expectations , it’s a step towards building loyalty for the product or service offered.
# When it comes to sales , motive should not be ‘one and done’. Repeat customers help in building a stable business. The consumers should be helped in getting most out of the offer given . More satisfied a customer is….better are the results. A follow up phone call or email after purchase can go a long way towards strengthening the relationship.
PROTECTION OF BUSINESS GOODWILL
Protection of Goodwill in business does not come easy. The key component of preserving value in business is protecting the Goodwill of business. In the first place , Goodwill in business should be identified only then it can be protected. It is all the value outside tangible assets and intellectual property . In today’s technological world it is quite easy to remain connected with the consumers to demonstrate goodwill. Unlike intellectual property, Goodwill cannot be protected using laws. It has to be managed , cultivated and documented. Business Goodwill has value like social media but, like social media , it is very difficult to own and measure.
ACCOUNTING FOR BUSINESS GOODWILL
BUSINESS GOODWILL = TOTAL WORTH OF THE BUSINESS – FAIR MARKET VALUE OF TANGIBLE ASSETS
GOODWILL = COST OF ACQUISITION – VALUE OF NET ASSETS
TO begin with , liabilities are deducted from identifiable assets like inventory and real estate , to determine the value of net identifiable assets.
NET IDENTIFIABLE ASSETS = ( INVENTORY + REAL ESTATE) – LIABILITIES
Without the availability of clear market rates if one has to value assets such as patents or clients lists , the data is based on estimate of future cash flow generated from the items in question . In addition to this , doctor’s office and law firms are professional companies which need to account for both practitioner’s Goodwill ( i.e. the value of the business as a whole ).
Cost approach is used by some businesses to value Business Goodwill. In this system , the financial cost of recreating the current level of goodwill from square one is estimated by the companies .
Comparative data from sales of similar businesses in the industry is also used . This helps businesses to calculate Goodwill as a percentage of the sale price.
AMORTIZATION OF GOODWILL
Write off of an asset over an expected period of useful life is referred to as amortization. The consistent reduction in the recorded value of an intangible asset over time is termed as amortization of intangibles. Amortization of Goodwill is no longer allowed under U.S. GAAP (FAS 142). FAS 142 was issued in June 2001. Annually Goodwill is to be measured to determine if there is an impairment loss.
Annual assessment of Goodwill is done by calculating the present value of future cash flows estimated from an asset. This present value of future cash flows is compared against the actual actuals every year. In case there is a drop in the cash flows estimated against the actual realization, this loss of value is charged in the books as reduction in Goodwill i.e Goodwill Impairment. For eg. If during a takeover fair value of assets of a company is Rs. 100 crores while the takeover cost paid is Rs.110 crores, the difference of Rs. 10 crores is booked as Goodwill. If during the assessment next year the cash flows from assets are found to be below the projected value, this decrease is mentioned as Goodwill Impairment and is reduced from the Goodwill of Rs.10 crores accordingly. There could be various reasons leading to Goodwill Impairment such as reduced quality of goods/services, inefficiency of manpower, change of strategy, delayed product developments and so on.
Goodwill is one of the first things measured by financial analysts specially when high stake and long term decisions have to be taken by corporates. This is something that a company has earned at the end of the day apart from present cash flows.