The end of a financial year is a good time to have a business health check prepared on your business. Business health checks are just as important to businesses as medical checkups are for humans. A business health check can highlight some potential problems before they cause real problems and cost a lot of money.
The types of activities that we can undertake, on your behalf, include:
- preparation of key performance indicators for your business and ratios on your Profit & Loss Account and Balance Sheet; and
- comparing these figures to your Budgets and benchmarking those results against similar businesses operating in other parts of Australia.
A key segment of the business health check is to undertake a financial evaluation of your business, particularly relating to:
- what is the break-even level of sales required to cover overhead costs.
- what does the analysis of working capital reveal?
Working capital comprises the key current assets, including debtors. This raises questions like:
- Review of Debtors’ Aged Analysis and calculation of debtors’ days outstanding.
- Stock investment, the calculation of the stockturn being achieved and the days of investment in stock.
- Work in Progress – calculation of the days of investment in work in progress.
- Bank Account – how does the level of your bank account compare to your negotiated bank facility?
- Creditors – calculation of creditors’ days outstanding and Creditors’ Aged Analysis.
This then enables the calculation of the Working Capital and the Current Ratio. The Current Ratio is the relationship between Current Assets and Current Liabilities. This is a key indicator closely examined by banks and is calculated by dividing Current Assets by Current Liabilities. Banks currently have an expectation that the Current Ratio will be 2+.
Bank Covenants – we will also review the various ratios, against the requirements of your bank (if any)
as specified in the bank covenants for any loan facilities that the bank has given to your business.
A business health check enables answers to be determined very quickly and strategies developed. It is very useful if you have borrowed money from a bank, or are proposing to borrow money from a bank, in that a review can be undertaken to ensure that your business is going to comply with your bank’s covenants for loans of this nature. If you’d like to discuss a Business Health Check, please don’t hesitate to contact us.
