Business health check

By Ben Youn

Copyright 2014 Quantum Business House

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- Business Forum

- Networking Events

- Business Mentoring


1. Setting up business structure (June 04) 2. Buying a business (June 11)3. Business Planning (June 18)4. Marketing (June 25)5. Raising Finance (July 02)6. Financial Management (July 09)7. Tax system and compliance issues (July 16)8. Risk management (July 23)9. Financial Health Check (July 30)10. Business Evaluation (August 06)


a process reviewing your business in general, and this includes inside and outside of the business. The general symptoms to look for are:

Customer / Supplier relationship

Internal checks including staff performance level, financials and policies

Whole business direction


Customer requests and orders get misplaced or not following through

Quotes and invoices contain errors or are not sent out

The word ‘sorry’ becomes a common part of the conversations with customers and suppliers

Invoices are not paid on time

Requests for credit references are rejected

Limited credit purchase or shortened credit terms

Reduction in the amount of contact you are receiving from customers and suppliers


Employee job satisfaction is low with increased sick-leave, late arrivals and early departure

Finger pointing culture

High staff turnover

Tight cashflow

Lower profitability in unit level and whole business level


What the business actually is vs. what you hoped it would be

Short term and long term future of the business

Understanding the economic and competitive environment


Rather than scratch the itch, take the time to understand why it is there.

Customer feedback and assessment about price, product / service range, service levels, communication and relationship management.

Take action on their (customer’s point of view) –customer value oriented.

The principle that the organisation and every position in it exists because what is required to be done takes more than one person to do it – organisational change.


Vitally important esp. difficult times.

Regular check of financial position.

Is my business viable?

Can we maintain our businesses for future growth?

15 Core Ratios

Have a good accountant as your business doctor


Collection of debts on time (discuss with debtors in early stage if you believe they are in risky position)

Maximise terms with major suppliers Minimise stock level (Just In Time) Sell Not-Really-Necessary Assets to secure

some cash inflow. Regular cashflow forecasting for both short-

term and long term Have a chat with your bankers for a loan if

necessary


CFF provides information on future cash resources and how the cash will be applied to the business.

integral part of business planning that indicates additional funding requirements in advance so the business owners and managers can be prepared.


Working capital to total sales

Total current assets less total current liabilities / Total sales

indicates how much working capital per dollar of sales the business should be maintaining. The right percentage of the working capital per sales dollars vary business by business depending on the item price and inventory turnover level


Current Ratio

Total Current Assets / Total Current Liabilities

measures whether the business holds enough current assets to meet the debts level with a margin of safety, and the acceptable ratio is 2:1 generally though it varies depends on the industry.


Leverage (gearing) ratio

Total Liabilities / Total Equity × 100

the level of debt financing against equity to fund the assets of the business. Generally, the higher the ratio, the more difficult to get further finance.


A profitable business is a successful business.

Prepare regular financial statement to check your performance (what can be measured is more likely to be achieved).

Focus sales with highest sales margin. Don’t discount unless you can achieve the

same or better gross profit through increased volume.

Control costs. Be flexible with your staffing.


Gross Profit Margin

Gross Profit / Net Sales * 100

The percentage of sales dollars remaining to pay overhead expenses after deducting cost of sales (Cost of Goods Sold).

This analysis will assist you assessing the efficiency of pricing, stock purchasing procedures and handling as well managed


Mark-Up

Gross Profit / Cost of Sales * 100

The percentage difference between the actual cost and the selling price. It is to ensure the business sells the products covering all the costs incurred with the sales


EBIT Margin

Net profit before interest and tax / Net Sales * 100

EBIT stands for Earnings Before Interest and Tax, and this measure can be useful when comparing against industry benchmark figures.

Interest and tax are excluded when comparing against benchmark as each business has different figures regardless of their business performance.


Net Profit Margin

Net Profit / Total Income * 100

Unlike EBIT margin, net profit margin includes interest and tax. This is useful figure when comparing with different periods within the business.


Break-Even Analysis

Overhead Expenses / 1- (cost of goods sold ÷ net sales)

How many sales dollars achieved before all the expenses are covered and actual profit begins

Useful to set sales targets for the business or for sales employees.


A business must ensure that it is efficiently utilising and controlling its assets and liabilities. The measures below can be used for this purpose.


Inventory Turnover

Cost of Goods Sold / Average stock held for the period

This indicates the number of times the stock in the business has turned over, and the lower the rate, the longer the stock is taking to turn over.

This brings issues about aged and / or over (excess) stock holdings for the business resulting liquidity issue.


Total stock on hand to total assets

Total stock on hand / Total assets * 100

This measures percentage of stock on hand included in the overall assets of the business.

If high rate of assets is tied up in inventory and the inventory turnover is relatively low, it could be a signal of inventory mismanagement.


Days Receivables

Total debtors × days in the period / Total credit sales of days in the period

This measure indicates how fast accounts from the credit sales are being collected.

Indications of slow paying customers and potential bad debts.


Days Payables

Total creditors × days in the period / The total cost of goods sold for the period

This shows how well account payables are being managed. If suppliers are being paid on average earlier than the trading terms, cashflow will be negatively impacted. The opposite case will be possible relationship damage with suppliers.


Total asset turnover

Net Sales / Total Assets

This measures the ability of a business to use its assets to generate sales.

The lower the total asset turnover ratio, the more sluggish the business sales are.

Each asset item should be separately reviewed to identify the problem areas.


Return on Assets (ROA)

Net profit before tax / Total assets * 100

This ratio indicates how efficiently profits are being generated from the assets employed in the business comparing with the benchmark ratios.


Return on Equity /Investment (ROI)

Net profit before tax / Total equity * 100 This could be the best indicator for business

performance. Indicates how well the business efforts

transferred to business returns. If ROI is lower than investment returns of

others (such as bank term deposit), this raises the ultimate question for the investment itself.



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