Department of Finance and Services
Basic Financial Capacity Assessment Template
[Contracting party]
January 2013
ABN [xxx xxx xxx]
Department of Finance and Services – Basic Financial Assessment Report
Executive Summary
Recommendations and Conclusions
Criteria
Conclusion
Financial capacity
Dept. criteria
[Acceptable /
unacceptable AND
list any specific
conditions, e.g. limit
to contract size of
$XXX ]
Financial
performance &
liquidity
[Acceptable /
unacceptable or
other, AND material
specific conditions
impacting the
conclusion]
Other considerations
[Acceptable /
unacceptable or
other appropriate
conclusion]
Supporting evidence
•
The proposed contract with [Contractor] falls [within / outside] the departments three financial capacity criteria.
•
To include summary of key factors supporting final conclusion.
•
To include any additional factors or considerations in reaching a conclusion e.g. additional requirements or guarantees from
the Contractor in order to secure approval. This may include:
• Agreement to provide additional information for monitoring purposes
• A guarantee from a related party
Recommendations:
•
[Contractor] Pty Ltd to be [accepted/rejected] for the proposed tender, with tender value limited to $[X]m dependent on the department assessment
criteria (AND major factors influencing the recommendation).
Department of Finance and Services – Basic Financial Assessment Report
2
Contract summary & assessment criteria
Financial Assessment Matrix
Contract Summary
Contract/Tender
Details
Contract size
Contract name
Contractor
revenue
Contract description / nature
Unless the review is performed shortly
following year end, the annual financial
statement may not be an accurate
reflection of the current financial
position of the contractor.
Contract size
Basic
Assessment
Medium
Assessment
The DFS criteria should be applied to
the most recent month end balance
sheet available which in some cases
will be sourced from recent
management accounts as opposed to
annual financial statements.
Proposed start date
Duration (months)
Contract value as % of LTM Revenue
< $10.0m
n/a
< $25.0m


> $10.0m
> $25.0m
< $300.0m


Comprehensive
Assessment
NB - the reviewer will need to consider
any significant adjustments necessary
most notably classification of related
party receivables between long term
and short term, which can significantly
impact the working capital criteria.
Within contractors size capability (Y/N)
< $1.0m
> $300.0m

The following rule should be followed by the financial assessor:
If the most recent year-end financial accounts are < 6 months old, the revenue from these accounts
should be compared to the thresholds of the financial assessment matrix.
If the most recent year-end financial accounts are > 6 months old, the revenue recorded in the
current year to date should be annualised and compared to the thresholds of the financial
assessment matrix. (e.g. if 7 months of revenue data is available, this can be annualised by
multiplying by 12/7).
DFS Assessment Criteria
Criteria:
Critical Value (based on $[ ]m contract
[Contractor] Pty Ltd
Criteria m et?
NTA
Working Capital
Current
Ratio
>5% contract
value
>10% of contract
value
>1
> $[ ]
> $[ ]
>1
$[ ]
$[ ]
[]
(Yes/No)
(Yes/No)
(Yes/No)
Department of Finance and Services – Basic Financial Assessment Report
•
The criteria for report level selection is based on both the contract size and
the annual revenue of the contractor shown above.
•
The proposed contract value totals $[X]. The proposed contractor had
revenues in FY12 of $[X]m. Therefore a “Medium Assessment” has been
undertaken.
Note: Any other work with the department currently being tendered for needs to
be considered in aggregate.
3
[The executive summary is to be used to summarise key findings and risks identified in the main body, and to assign risk
weightings for each category. Commentary should be of sufficient detail to justify the risk weighting assigned. On completion we
would expect it to be no more than 5 slides in length]
Executive Summary
Understanding the contractor’s ownership and structure
Analysis
Area
Questions / Issues to be Considered
Rating
Is the contractor a legal entity? Is the “trading” entity and
corporate entity you are dealing with the same?
Comments & Mitigating Actions
State contracting entity name.
Confirm if the contracting entity is the same entity as that which will provide the service.
Entity identity
If separate entities, further investigation required into the entity providing the services
and why a different entity is being proposed .
Do other entities within the corporate group add potential
risk to the contracting party?
Summarise relationships with other group entities or related parties & note whether they
are critical to the completion of the contact or to the continual operation of the group.
Indicators of higher risk could include (but are not limited to):
1. The existence of relationships critical to completion of the contract (e.g. provision of
equipment, critical services) with entities or related parties deemed higher risk. e.g.
due to poor financial performance or position, being subject to litigation, or subject to
other significant liabilities.
Wider
corporate tree
Are owners and/or directors of good reputation? Do they
add potential additional financial risk?
Major
shareholders/
partners /
directors
2.
Note. The related party relationship risk could impact the group through intercompany loans, guarantees, cross-collateralised security or direct security.
1.
The following searches should be completed on all Directors, Key Management,
major shareholders (those with significant influence), besides the entity name:
2.
•
ASIC search - to identify directors subject to disqualifications or instances
holding directorships of companies which entered insolvency proceedings.
•
ITSA search - to identify bankrupted directors / managers
•
General media search (e.g. Google) – for undesirable media coverage
•
Credit checks with recognised credit agency (e.g. Dunn & Bradstreet,
VEDA) – To identify credit history and charges against the entity
•
PPSR search – To identify all parties with charges over the entity
Obtain references from a sample of contractors and suppliers.
•
Provide details of references obtained and report any adverse comments.
Indicators of higher risk could include (but are not limited to):
Instances of director disqualifications, having held directorships of failed companies at
the time of failure, directors or managers having been the subject of investigations for
corruption or unethical business practices (regardless of conclusion), winding up orders
or judgements against the company, unfavourable references from suppliers e.g.
instances of non payment or continually disputing works with little justification.
Risk Definitions: Low Risk
Medium Risk
Department of Finance and Services – Basic Financial Assessment Report
High Risk
4
Executive Summary
Understanding the contractor’s ownership and structure
Analysis
Area
Questions / Issues to be Considered
Rating
Comments & Mitigating Actions
Summarise key management’s experience in projects of a similar nature and size to that
proposed.
Are key management capable of delivering the contract?
Consider tenure, experience in industry, experience as a
manager.
If the extent of relevant experience is questionable, detail any mitigating factors that may
mean they still have the capability.
Executive
management
Indicators of higher risk could include (but are not limited to):
Lack of proven technical expertise to complete a job of the proposed nature or lack of
experience managing jobs of the proposed size.
Would the absence of a key owner or manager in the
business put at risk their capacity to complete the
contract?
Summarise any instances identified where the company is overly reliant on any one
person to perform functions which are critical to completion of the contract or the
continued operation of the business.
Indicators of higher risk could include (but are not limited to):
Substantially all sales are generated by a single person, one person manages
substantially all projects, one person possesses expertise or ‘know how’ critical to the
contract which is not shared by others in the business.
Key man risk
Consider and comment on any succession or contingency plans in place to mitigate the
loss in the event of ‘key man’ departure.
Are the markets in which the business operates growing
or attractive markets with good “economics” or are they
in decline?
Summarise the markets / industry subsectors in which the contractor operates noting the
most significant.
Include high level commentary on economic trends in the industry (e.g. favourable /
unfavourable, flat), reference sources such as the Australian Bureau of Statistics or
industry specific publications.
Core
offerings and
markets
Risk Definitions: Low Risk
Indicators of higher risk could include (but are not limited to):
The contractor primarily operates in contracting markets, with little diversification within
the business.
Medium Risk
Department of Finance and Services – Basic Financial Assessment Report
High Risk
5
Executive Summary
Understanding the contractor’s business
Analysis
Area
Questions / Issues to be Considered
Rating
Does the business have significant reliance on a small
number of customers or is their revenue more spread?
Are the major customers a potential financial risk
themselves?
Comments & Mitigating Actions
State the number of jobs completed and the number of clients served in the past 12
months & if known, comment on level of concentration expected in the forecast period.
Indicators of higher risk could include (but are not limited to):
Customer concentration or reliance on a small number of projects contributing a high
proportion of a contractor’s revenue. This presents two main risks:
Key
customers
1.
Loss of a single customer could have a disproportionately negative impact on a
contractors revenue and profitability (may be mitigated by the existence of long term
contracts).
2.
Any delay or failure to pay a large receivable could also have a disproportionately
large negative impact on a contractor’s liquidity.
Risk is increased if customers relied upon are known to be experiencing financial
difficulty - the financial position of those customers should also be considered.
Is the business highly reliant on a key supplier which, if
disrupted, could damage the business’ capacity to
deliver its contract obligations? Is it highly reliant on a
commodity or input and could a material price variation
impact its financial stability?
Are supplies sourced from many or few suppliers? If concentrated, are supplies generic
or specialist in nature? If generic; alternative supply likely to be readily available
(therefore lower risk)
Are any contingency plans in place to mitigate breaks in supply (e.g. stock piles of the
specialist stock? Alternative suppliers already identified and contracts in place?).
Reliance on a small number of key suppliers presents the following risks:
Key suppliers
and supply
chain
1.
Disruption to a single supplier could have a disproportionately negative impact on a
contractors ability to deliver the project.
2.
Any pricing increases could have a disproportionately negative impact on a
contractor’s cost base.
Indicators of higher risk could include (but are not limited to):
Use of specialist supplies which are available from few suppliers in a manner which is
critical to the completion of contracts; lack of contingency plans in place to mitigate
breaks in supply; any indication of a ‘critical supplier’ being in financial difficulty.
Reliance on a commodity or imported input exposes the contractor to commodity price
fluctuations or fluctuations in exchange rates.
Risk Definitions: Low Risk
Medium Risk
Department of Finance and Services – Basic Financial Assessment Report
High Risk
6
Executive Summary
Understanding the contractor’s business
Analysis
Area
Questions / Issues to be Considered
Rating
Is there a history of significant claims on projects
completed?
Claims and
associated
contingencies
Comments & Mitigating Actions
Summarise history of any significant claims and any unsettled outstanding claims.
Are there any outstanding claims against the contractor
(e.g. damages for delays, failure to perform) or claims by
the contractor (e.g. for variations)
Has the value of any claims pending been agreed?
Could a change in regulatory environment significantly
impact the business’ capacity to continue to operate in
key markets?
Summarise any proposed or likely regulatory changes that could impact completion of
the contract or continuance of the business:
Indicators of higher risk (adverse impact) could include (but are not limited to):
Revised construction regulations requiring more onerous testing / safety processes,
banning of a key material or construction technique used by the contractor.
Regulatory
environment
Indicators of lower risk (or increased opportunities) could include (but are not
limited to):
Release of land for development or lifting of other use restrictions resulting in increased
opportunities.
Is the business entering new markets or launching new
services? If successful or not, could this impact their
capacity to deliver to existing customers?
Comment on any plans to enter new markets (consider both new products / offerings
and new markets measured by project size).
Consider the significance of these plans to the business going forwards (e.g. compare
‘new’ revenues to existing revenues).
Reliance on the success of a new service or entrance into a new market presents the
following risks:
New markets
and products
–
pressure on working capital to support the growth in the business as a result of
the new service or market.
–
a deterioration in business revenues and profitability should the new
service/market prove to be unsuccessful; particularly where the move was driven
by a decline in the contractor’s existing business.
Conversely, if no plans to diversify, consider if this is appropriate? (e.g. is the existing
market growing or contracting?, is competition increasing?)
Risk Definitions: Low Risk
Medium Risk
Department of Finance and Services – Basic Financial Assessment Report
Indicators of higher risk could include (but are not limited to):
Over reliance on successful entry into new markets in which the contractor has no
proven track record.
High Risk
7
Similarly, remaining reliant on existing markets with no diversification may be a high risk
strategy if existing markets are in decline.
Executive Summary
Understanding the contractor’s financial capacity
Analysis Area
Questions / Issues to be Considered
Rating
What is the trajectory of the business performance?
Is revenue growth being translated to improved
profit? Is declining revenue able to be mitigated by
reduced cost?
Comments & Mitigating Actions
Summarise headline numbers (e.g. Revenue, Gross profit, Net Profit) and key trends or
issues identified in main body of the report.
Example wording:
• ABC has been profitable for the last three years.
Basic profitability
• Revenue has grown from $[X] in FY10 to $[X] in FY12 (X% over the period).
• NPAT increased from $[X] in FY10 to $[X] in FY12 (X% over the period).
Indicators of higher risk could include (but are not limited to):
Declining revenue and/or declining profit margins where cost reduction does not offset
reduced margins.
Is revenue growth being translated to improved
cash flow? Are the financing requirements of the
business beyond the capacity of existing finance
facilities or equity capability of shareholders?
Summarise headline numbers (e.g. Closing cash, Net cash flow, overdraft headroom)
and key trends or issues identified in main body of report.
Example wording:
• ABC has been cash flow positive for three years and was able to pay dividends of approximately
[X]% of NPAT in FY12. $[X] of cash is on hand at 30 June 2012 and a further $[X] of headroom is
available from the $[X] overdraft facility
Liquidity measures
• Working capital is steady with debtor and creditor days at acceptable levels.
Indicators of higher risk could include (but are not limited to):
Negative net cash flow, reducing bank facility headroom, disproportionate increases or
decreases in net working capital to revenue may indicate a deterioration in performance.
Forward pipeline /
order position
Is there visibility to the business’ pipeline of future
work? Assuming historic “win rates”, is the pipeline
sufficient
to
underpin
acceptable
financial
performance going forward?
For contracted work in hand, summarise the number of jobs, the value of associated
work completed to date, the value of work to go and the period over which it is expected
to be completed.
If a pipeline report is available summarise the number and value of opportunities
identified / the expected start date and state the contractors claimed historical win rate.
[include pipeline if
information
available]
Risk Definitions: Low Risk
Indicators of higher risk could include (but are not limited to):
Current work in hand is small in relation to historical and or forecast revenue levels
indicating limited secured work going forwards; a small pipeline value in relation to
annual turnover (after applying the historical win rate on tenders); a pipeline comprising a
significant proportion of jobs of a size or nature substantially different to the contractors
proven capabilities.
Medium Risk
Department of Finance and Services – Basic Financial Assessment Report
High Risk
8
Executive Summary
Understanding the contractor’s financial capacity
Analysis Area
Significance of the
proposed contract
to the contractor
Financier
relationship, debt
facility headroom,
covenants, term
Questions / Issues to be Considered
Rating
Is the proposed contract of such significance to the
contractor (in size or nature) that the contractor will
become reliant on the contract or Government for
ongoing financial stability?
State the significance of the size of the contract proposed in relation to the last 12
months revenue and in relation to the size of existing contracts .
Does the business have a good relationship with its
financier?
Do they have a “history” with the
financier? When do existing facilities expire? Do
they expect them to be extended on similar or better
terms? What are the facility limits? Do they have
sufficient headroom to fund contract growth or
absorb a shock? Are they in compliance with
covenants? How much headroom exists?
Include a high level summary of the contractors financing facilities including, with whom
they are held, and when they expire.
Indicators of higher risk could include (but are not limited to):
If the contract size represents a significant level of current annual revenues, this could
suggest on-going reliance on the contract.
Summarise any discussions held with the bank / financier including confirmation of
adherence to facility terms and whether the contractor is subject to any additional
guarantees or charges. Include any “qualitative” comments regarding relationship.
Indicators of higher risk could include (but are not limited to):
A history of breaching facility terms, low headroom in relation to the business size
(revenue), facilities expiring in a short period (say <6mths) with no alternative facilities
having been arranged, guarantees or charges over the business (shares or assets) in
relation to other higher risk entities, adverse relationship comments from financier.
What is the capacity of the business to absorb a
major movement or shock in its business?
Revenue / margin /
working cap
sensitivity
Comments & Mitigating Actions
Example wording:
• Assuming gross margin & overheads remain consistent with FY[ ], a [ ] % fall in revenue would
result in a fall in profitability to a break even position.
Examples include: loss of a major customer;
winning a major contract; material change in input
cost; failure or loss of a key supplier; a major
change in customer or supplier payment terms;
interest rate or forex movement.
Risk Definitions: Low Risk
Medium Risk
Department of Finance and Services – Basic Financial Assessment Report
High Risk
9
Ownership and Structure
Understanding the contractor’s ownership and structure
Float (if applicable)
[ ] family trusts and other
holding structures
XX%
XX%
[Contractor] Group
Holdings Pty Ltd
[Contractor] Pty
Ltd
Trading entity?
Confirm if the contracting party will be the entity responsible for
performance of the contract.
ABN / ACN
XX XXXX XXXX
Registered
address
XXX Smith Street,
Sydney NSW 2000
•
X%
X%
Business
description
XX
XX Pty Ltd
X%
X%
Group name /
Head company
X%
[Cross Guarantee
XX Services
Pty Ltd
[Contractor] Pty Ltd
[ ] Institutional shareholders
XX%
X%
Contracting Party
$Xm]
XX
XX
•
Update group structure as applicable
•
Note any guarantees, charges or other relevant security between group entities and
related parties and the magnitude of any such security.
Example wording:
• Smith Group is a construction contractor specialising in NSW
housing developments with contracts ranging between $5$15m.
[Contractor] Group Holdings Pty Ltd
Establish and comment if a contractor is commercially reliant
on or exposed to a related entity or party. If so, financial
capacity of the related entity or the wider group should be
established.
Example relationships could include:
Wider Corporate
Tree
Ownership
Department of Finance and Services – Basic Financial Assessment Report
Refer to industry and subsector of industry in which
contractor operates and typical contract size.
10
•
reliance on related entities for employees, plant or other
services required for a contract,
•
where a contractor’s financing was obtained via a related
entity loan,
•
where a contractor’s future cash flows rely on collection of
related party receivables,
•
where the contractor’s assets / business acts as security for
financing arrangements of a related entity where the
contractor has provided cross guarantees for the obligations
of a related party.
State significant shareholders and effective holding %
Ownership and Structure
Understanding the contractor’s ownership and structure
Management Structure (if relevant)
Provide a brief summary of significant events in the contractors
history including date of formation.
[Executive Director]
[Finance
Manager]
[HR Manager]
[Marketing
Manager]
History
(source from
discussions with
management and
company website)
[Sales Manager]
Example wording:
•
[Financial
Accountant]
$[ ]m warehouse construction in Western Sydney on behalf of
Listed Company PLC (2010)
Break down of total employees between full-time, part-time and
contractors.
Number of
employees
[Management
Accountant]
Department of Finance and Services – Basic Financial Assessment Report
List any significant projects the business has completed
including a brief description of services, customer details, value,
date completed and location.
11
Example wording:
•
[ x ] Full time employees
•
[ x ] Contractors
Ownership and Structure
Understanding the contractor’s ownership and structure
Directors Profiles
Manager Profiles
[Name]
[Name]
•
History with business: Since incorporation / Founder? If not, when joined? Previous
work history?
•
History with business: Date joined
•
•
Background check: Note outcome of ASIC, ITSA and media searches on an exception
basis, otherwise “No adverse results identified”
Background check; Note outcome of ASIC, ITSA and media searches on an
exception basis, otherwise “No adverse results identified”
•
•
Experience in industry: Prior Directorship experience? No. of years in industry? Extent
of experience in this sector? Previous companies? Project experience (Size and nature)
Experience in industry: No. of years in industry? Extent of experience in this sector?
Previous companies? Project experience (Size and nature)
•
•
Key Person (Y/N)? If so, provide details of why critical to the business AND any
mitigating plans should they leave (i.e. details of succession planning, other contingency
plans?).
Key Person (Y/N)? - If so, provide details of why critical to the business AND any
mitigating plans should they leave (i.e. details of succession planning, other
contingency plans?).
[Name]
[Name]
•
•
History with business: Date joined
•
Background check; Note outcome of ASIC, ITSA and media searches on an
exception basis, otherwise “No adverse results identified”
•
Experience in industry: No. of years in industry?, extent of experience in this sector?
Previous companies? Project experience (Size and nature)
•
Key Person (Y/N)? - If so, provide details of why critical to the business AND any
mitigating plans in place should they leave (i.e. succession planning?, other
contingency plans?).
History with business: Since incorporation / Founder? If not, when joined? Previous
work history?
•
Background check: Note outcome of ASIC, ITSA and media searches on an exception
basis, otherwise “No adverse results identified”
•
Experience in industry: Prior Directorship experience? No. of years in industry?, extent
of experience in this sector? Previous companies? Project experience (Size and nature)
•
Key Person (Y/N)? If so, provide details of why critical to the business AND any
mitigating plans should they leave (i.e. details of succession planning, other contingency
plans?).
Factors to consider:
• Is the Directors / Management’s experience and expertise sufficient to demonstrate capability to undertake the proposed contract?
•
Have the directors previously been involved in businesses which have entered financial difficulty and/or financial insolvency proceedings?
•
If so, is there any evidence of behaviour or management practices related to that situation which would be regarded as unsatisfactory? Unsatisfactory practices could include:
– failure to have addressed financial difficulties before those issues became terminal
– taking on high risk strategies and projects without appropriate capability and financial resources
– financial misconduct or breach of directors’ duties.
Department of Finance and Services – Basic Financial Assessment Report
12
Performance and Profitability
Financial Capacity
Profit & Loss
Profit & Loss
000's
Revenue
Cost of Sales
Gross Margin
Overheads
Wages
Rent / Electricity
Insurance
Administration
Other
Total Overheads
EBITDA
Depreciation & Amortisation
EBIT
Net Interest
NPBT
Tax
NPAT
FY10
FY11
-
FY12
-
Key Ratios
-
-
-
-
-
-
-
-
-
-
-
-
-
FY10
FY11
FY12
Profitability Ratios
Revenue Grow th
Gross Margin %
Overheads % of Revenue
EBIT Margin %
EBITDA Margin %
Net Profit Margin %
-
-
-
Other P&L Ratios
Effective Tax Rate %
Effective Interest Rate %
Dividend as a % of NPAT
-
-
-
Performance history
Commentary should be around profitability and trajectory aimed at identifying;
-
Trend of revenue (growing or contracting)
-
How movements have translated to profitability through:
Source: 1) FYXX & FYXX: Audited accounts 2) FYXX: Management accounts (unaudited)
[Note: Where recent full year data is not available, financial information
presented to include YTD results.]
-
Margin trends (improved or deteriorated)
-
Overhead movements (increased/decreased) on an absolute basis and as a
proportion of revenue.
Factors to consider:
• Interpretation of movements as to whether favourable or unfavourable in nature.
•
Explanation of the causes or key drivers of significant movements identified.
– e.g.- Deteriorating margins could be indicative of issues with project management
or execution and therefore evidence of increased risk to successful execution of
the proposed contract.
Example wording:
Department of Finance and Services – Basic Financial Assessment Report
13
•
ABC has been profitable for the last three years.
•
Revenue has grown from $[X] in FY10 to $[X] in FY12 ([X]% on an annual basis).
•
Gross margins fell from X% to X% owing to tightening tendering conditions
•
NPAT increased from $[X] in FY10 to $[X] in FY12.
Performance and Profitability
The contractors business
Work on hand & pipeline
Work on Hand (Revenue)
($m )
Total Project
Value
Project 1
Project 2
Project 3
Project 4
Project 5
Project 6
Project 7
Project 8
Project 9
Project 10
Total Work on Hand
Am ount
Com pleted
-
% Com pleted
-
-
Am ount
Rem aining
-
Current work on hand
% Rem aining
This section aims to identify projects on hand (being undertaken) by a bidder, their
current status, and the extent of secured work remaining.
-
Factors to consider:
• How significant is the level of secured work going forward? (e.g. compare to annual
turnover).
– A small proportion demonstrates limited secured work and potentially higher risk.
– Conversely, a company with a disproportionately large number of projects in
progress may not have the capacity to take on additional projects.
•
Have any issues (e.g. delays or costs over runs) been experienced on jobs in hand?
– What was the nature of those issues and how have they been resolved / mitigated
going forwards?
Pipeline Summary [if available]
# of bids /
opportunities
Gross
Value $m
Historical
Win rate
Net value
$m
Bids Submitted
[]
[]
[]
Identified opportunities
[]
[]
[]
Estimated pipeline value
[]
Revenue by Customer / Project ($m)
FY12
Pipeline [if available]
Factors to consider:
• Opportunities identified in the pipeline may include a ‘probability of success’ –
consider the historical win rate vs. forecast run rate.
•
A small pipeline value in relation to annual turnover (after applying the historical win
rate), may indicate a shortfall in future work.
•
Does the pipeline contain opportunities of the size and nature that are within the
contractors proven capabilities?
•
Is there an appropriate basis for inclusion of each opportunity in the pipeline?
$[ ]m
% of total
Customer concentration
Customer 1
This section aims to identify any apparent over reliance on a limited number of
customers and any mitigating factors.
Customer 2
Factors to consider:
• Identify the key customers from which revenue is generated and comment on the
concentration.
Customer 3
Customer 4
– A high percentage of revenue generated from only a handful of customers
suggests possible overreliance.
Customer 5
Others
•
If apparent overreliance is identified, consider the financial position of those
customers relied upon. Risk will be increased if they are experiencing financial
difficulty.
•
If a pipeline is available, comment on the extent to which concentration is expected to
increase or decrease going forwards.
TOTAL
Department of Finance and Services – Basic Financial Assessment Report
14
Cash Flow & Liquidity
Financial Capacity
Financial position
Balance Sheet
$ 000's
FY10
ASSETS
Cash & cash equivalents
Receivables
Inventory/ WIP
Other current assets
Total current assets
Property, Plant & Equipment
Intangibles
Other non-current assets
Total assets
LIABILITIES
Creditors & accruals
Short term debt
Other current liabilities
Total current liabilities
Long term debt
Other non-current liabilities
Total liabilities
Net assets (Equity)
FY11
FY12
-
-
-
-
-
-
-
-
-
-
-
-
% Change
FY11-FY12
Key Ratios
Working Capital ratios
Current Ratio
Days Debtors
Days Creditors
Days Inventory
NWC ($ 000's)
NWC/Sales
Financing ratios
Net Debt to Equity
Net Debt to Total Assets
Total Debt to Equity
Debt Service ratios
EBITDA Interest Coverage
Total Debt to EBITDA
-
-
FY10
FY11
FY12
-
-
-
-
-
-
-
-
-
Factors to consider:
• Interpretation of movements as to whether favourable or unfavourable in nature.
•
Explanation of the causes or key drivers of significant movements identified.
Source: 1) FYXX & FYXX: Audited accounts 2) FYXX: Management accounts (unaudited)
•
Relativity of measures e.g. comparison of debtor/creditor days to the contractors
general terms or industry parameters and note whether acceptable.
Financial position and Liquidity
•
Any unusual movements between periods that might reflect;
Commentary should be around net asset position, working capital and cash, and their
associated trajectories, aimed at identifying;
-
Any actual or near balance sheet insolvency issues
-
The level of cash available and the level of debt
-
Trends in key working capital ratios including:
-
-
Current ratio (improved or deteriorated)
-
Debtor days, WIP/Inventory Days and Creditor days (improved or deteriorated)
-
NWC as a proportion of sales (increased or decreased)
•
Note any material related party receivables / payables / loans.
Department of Finance and Services – Basic Financial Assessment Report
15
-
liquidity pressure,
-
issues with collection on a project that may relate to performance or customer
liquidity,
-
unsustainable creditor stretch.
Level of debt (consider financing ratio’s above vs. industry averages and whether
appear excessive ) and the source of debt (i.e. external lender or related party
loans?).
Cash Flow & Liquidity
Financial Capacity
Cash flow
Cash Flow Statem ent
$ 000's
FY10
FY11
FY12
-
-
-
NPAT
Non-cash items
Working capital movement
Cash flow from operating activities
Cash flow from investing activities
Cash flow from financing activities
Distributable cash flow
Dividends paid
Net cash flow
-
-
-
% Change
FY11-FY12
Cash flow
Commentary should be around cash generation and trajectory aimed at identifying;
-
-
-
-
C ur r ent
T o t als
1- 3 0
-
C r ed it o r ( $)
C ur r ent
T o t als
3 1- 6 0
-
1- 3 0
-
6 1- 9 0
-
3 1- 6 0
-
Over 9 0
-
6 1- 9 0
-
Over 9 0
-
-
Were there any significant borrowings or repayments in the period?
-
How much CAPEX was made in the period?
-
The level of net cash flow and resultant headroom vs. facilities available.
•
How much cash has been extracted as dividends by the businesses owners? Is the
amount appropriate and sustainable? For example dividends that exceed say 75% of
profit may result in the business being undercapitalised.
•
Was the level of CAPEX one-off in nature or is it recurring? Is CAPEX sufficient to
maintain the asset base of the business (Comparison to Depreciation expense)?
•
Interpretation of other movements as to whether favourable or unfavourable in
nature.
T o t al
-
-
T o t al
-
What’s the trend (increasing or decreasing)?
Factors to consider:
• Was operating cash flow generated predominantly earnings driven (sustainable) or
working capital movement driven (non-sustainable)?
Source: 1) FYXX & FYXX: Audited accounts 2) FYXX: Management accounts (unaudited)
D eb t o r ( $)
Is the business generating cash from operating activities?
-
Debtors and Creditor Ageing
•
Debtor-Creditor Days
50
Days
40
30
31.54
30.39
Factors to consider:
• Comparison of the ageing of debtors / creditors to contractual terms (credit offered to
customers and credit received).
43.50
42.48
41.87
34.18
•
20
10
0
This section aims to identify potential debtor recoverability issues and any potential
stretch in creditors.
Creditor balances aged beyond normal trading terms may indicate liquidity pressure
or unsustainable credit stretch, whilst aged debtors may indicate recoverability
issues.
Example wording:
FY10
FY11
Days Debtors
FY12
Days Creditors
Department of Finance and Services – Basic Financial Assessment Report
16
•
With the exception of $[ ]k receivable from [debtor], all debtors are less than 60 days old and
are therefore within an acceptable range of 45 day credit terms.
•
Creditors ageing is within an acceptable range of average terms of 30 to 45 days with the
majority of balances aged less than 60 days.
Financing facilities
Financial Capacity
Facilities schedule as at [Date]
Facility /
Account
Financier
Facility
Limit
Amount
Drawn
Available
Balance
Remaining
Term
Refinancing
required in contract
period? (Y/N)
Covenants
Overdraft
Term Loan
[Other facilities]
Cheque Account
Total
This section aims to identify the funding facilities and headroom currently available to the
contractor and any scope for additional or alternative funding should it be required.
–
existence of offers of finance from new financiers
–
whether the business gearing levels are within reasonably acceptable levels
indicating capacity to borrow further funds.
Available facilities and funds
•
Factors to consider:
• Do facilities expire during the life of the contract and are they expected to be
extended on similar or better terms?
•
Do facilities include covenants and are they currently and forecast to be in
compliance with those covenants and other terms?
•
Do they have sufficient headroom (available cash and extent of undrawn overdraft to
fund the business forecast or absorb a shock or reasonable variance from forecast?
•
If the contracting entity required access to additional debt financing this requires an
assessment of:
– the status of the contractor’s relationship with its financier and willingness to
provide additional finance
Department of Finance and Services – Basic Financial Assessment Report
If financial support is required from shareholders, key considerations are:
–
17
The capacity (ability & willingness) of current or new shareholders to contribute
additional equity which will be a function of their own financial capacity and view
on price and risk.
Profitability
Financial Capacity
Example visual representation of profitability & performance
[Charts populated for illustrative purposes only]
9,000
8,000
7,000
6,000
5,000
4,000
3,000
2,000
1,000
0
Gross Margin
7,895
7,389
7,148
735
609
534
FY10
FY11
Revenue
FY12
EBITDA
1,400
10.0%
9.0%
8.0%
7.0%
6.0%
5.0%
4.0%
3.0%
2.0%
1.0%
0.0%
1,200
1,275
1,139
15.5%
800
15.0%
600
14.5%
400
14.0%
200
-
FY10
FY11
Gross Margin %
NWC to Sales
NPAT Bridge FY11 to FY12
165
161
160
155
(370)
(10)
(41)
270
(34)
$ 000's
506
13.5%
Include explanatory comments key observations
Include explanatory comments key observations
$ 000's
FY12
EBITDA Margin %
Gross profit
900
800
700
600
500
400
300
200
100
0
16.5%
16.0%
1,034
1,000
$ 000's
$ 000's
Revenue & EBITDA
(15)
305
2.1%
2.1%
151
150
2.0%
145
1.9%
135
1.9%
FY10
FY11
NWC
Department of Finance and Services – Basic Financial Assessment Report
2.0%
141
140
130
FY12
NWC/Sales
Include explanatory comments key observations
Include explanatory comments key observations
18
2.2%
1.8%
Glossary
Glossary
Term
Amortisation
ASIC
Capex
Cash flow from
operations
Definition
Similar to depreciation, amortisation is the allocation of the cost of an intangible asset over its useful life and represents a cost charged to the income statement. Only
applies to intangible assets that have a finite life (eg. Licences, patents).
Australian Securities & Investment Commission (ASIC) is Australia’s corporate, markets and financial services regulator.
Capital Expenditure (CAPEX) is the use of funds by a company to upgrade existing or acquire new physical assets such as property, buildings or equipment.
Measures the cash generated from the business’ operating activities only (ie. before any financing or investing cash flows).
Cash flow from
investing
Comprises the net cash movement in the period attributable to sale or purchase of investments and any related cash flows (eg. associated income received).
Investments include capital assets such as plant and machinery, as well as other investments related to the financial markets (eg. Shares in other companies or
financial assets).
Cash flow from
financing
Measures the net cash movement in the period from activities used to fund the business. Will typically include drawdowns or repayment of debt, cash in flows from any
equity raised or payment of dividends to shareholders.
COGS
Covenant
Creditor
Debtor
EBIT
EBITDA
F’cast
Cost of Goods Sold- are costs directly associated with the production of the goods or services sold by a company. These costs include both the materials that are
used in the production process, as well as the cost of any labour directly used in the process.
A promise in an indenture, or any other formal debt agreement, that certain activities will or will not be carried out.
A party to whom money is owed by the business. (a.k.a ‘Payables’)
A party that owes the business money. (a.k.a ‘Receivables’)
Earnings before interest and tax (EBIT) is a measure of a company’s profitability, calculated as revenue minus expenses, excluding tax and interest.
Earnings before interest, tax, depreciation and amortisation (EBITDA) is calculated as revenue less expenses excluding the tax liability, interest, amortisation and
depreciation charges for the period.
Abbreviation for forecast.
Department of Finance and Services – Basic Financial Assessment Report
19
Glossary
Glossary
Term
FY
GM%
Gearing
Gross Profit
Intangible assets
Liquidity
LTM
NPBT
Net Profit/ NPAT
Net Cash Flow
Net Interest
NTA
Net Working
Capital
WIP
Definition
Abbreviation for financial year
Gross margin (GM%) is a company’s revenue less cost of sales (a.k.a ‘Gross Profit’), divided by revenue. The gross margin represents the percentage of total sales
revenue that the company retains after incurring the direct costs associated with producing the goods and services sold by a company.
Gearing looks at explaining how a company finances its operations, through debt or equity. Often expressed as a percentage of debt to equity, the higher the
percentage, the more the company is “geared” (higher amount of debt).
A company's revenue minus it’s cost of goods sold.
Assets that cannot be physically touched but which provide economic benefit to the owner. Some examples include goodwill, patents & copyrights.
Liquidity refers to the ability to convert assets to cash quickly and easily with limited if any loss in value.
Abbreviation for last twelve months.
Residual profit after all expenses with the exception of tax.
Net profit after tax (NPAT) is the residual profit earned by a business after all expenses (including tax, interest, depreciations and amortisation) have been deducted
from revenue. This measures whether the company has made (or lost) money in the period.
All cash inflows (receipts) less all cash outflows (payments).
Net interest in the profit & loss statement is calculated as interest income less interest expense.
Net tangible assets (NTA) is calculated as total assets less any intangibles, less total liabilities.
Calculated as a company’s current assets less current liabilities. Often used as a measure of a company’s liquidity.
Work in Progress (WIP) is the cost of any materials or other inputs that have entered the production process, but do not yet form part of a completed product. It does
not include raw materials that are yet to start in the production process, nor any finished products.
Department of Finance and Services – Basic Financial Assessment Report
20
Glossary
Glossary
Ratio
Calculation
Definition
Gross Margin %
(Gross Profit/ Revenue) x 100
Gross margin shows the percentage of sales revenue that the company is able to generate as
income after removing the cost of sales (those that are directly associated with producing the
good/service). A higher ratio is more desirable.
Overheads % of Revenue
(Total Overheads/ Revenue) x 100
This ratio looks at the proportion of overheads to total sales revenue of a company. The lower
the overheads (represented by a lower ratio), the lower the fixed cost base of the business.
The lower the fixed costs, the less vulnerable profits are to a fall in revenue.
EBIT Margin %
(EBIT/ Revenue) x 100
EBIT margin % is a ratio used to examine a company’s profitability. The higher the EBIT
Margin %, the more profitable a company is.
EBITDA Margin %
(EBITDA/ Revenue) x 100
EBITDA margin % is a ratio used to examine a company’s profitability, and because it excludes
the impact of depreciation and amortisation it gives a better indication into the core operating
profitability of a firm. A higher EBITDA Margin %, is more desirable as demonstrates increased
profitability of a company.
Net Profit Margin %
(NPAT/ Revenue) x 100
Measures the extent of every dollar of sales a company generates, that is able to be retained
as earnings. An increasing figure indicates that a company has better control over their costs,
while a declining margin could potentially suggest problems around cost control.
Effective Tax Rate %
(Tax/ NPBT) x 100
Actual tax payable by a company in a period divided by net taxable income before taxes.
Dividend as a % of NPAT
(Dividends Paid/ NPAT) x 100
Total dividends divided by net profit after tax.
(Current Assets/ Current Liabilities)
A very common liquidity measure to assess a company’s ability to meet its short term
obligations (those that fall due within the next 12 months). The higher the ratio, the more
capable a company is to repay those obligations. A current ratio below one suggests a
company is unable to meet its short term obligations from current assets. Note; this may not
necessarily represent a critical situation as there may be alternate forms of short-term financing
available, however it is generally a warning sign.
(Receivables/ Revenue) x 365
Provides a measure of the average number of days it takes for a company to get paid for either
the product it sells or service it provides. Has a tendency to fluctuate with the nature of the
business and industry and should be compared accordingly. A higher figure than the industry
average could suggest problems in the collection of debts that will impact the cash flow of the
business. In general, a lower number is preferred.
Current Ratio
Days Debtors
Department of Finance and Services – Basic Financial Assessment Report
21
Glossary
Glossary
Ratio
Calculation
Definition
Ratio that measures on average how long it takes a company to pay its creditors. A company
that has high creditor days (compared with industry average) could highlight that they are
experiencing problems in meeting these payments on time, or that they are deliberately
stretching this period as a method of financing their operations. Again typically varies
depending on industry.
Days Creditors
(Trade creditors/ Cost of Sales) x 365
Days Inventory
(Inventory/ Cost of Sales) x 365
Net Working Capital (NWC)
(Current Assets-Current Liabilities)
Net Working Capital looks at a company’s ability to meet its short-term liabilities. A higher
amount is again seen as preferential. Negative working capital can indicate liquidity problems in
being able to repay creditors, however in some industries this can be preferred.
NWC/ Sales
(NWC/Revenue) x 100
Ratio examines a company’s ability to generate sales from its working capital.
Net Debt to Equity
(Debt - Cash & Cash Equivalents)/ Net assets
Measures the proportion of net debt (debt less cash & equivalents) vs. equity used to finance a
company’s assets. A high ratio indicates that the company has used debt to fund its growth,
resulting in a higher interest expense and potentially greater financial risk. The industry the
company operates in will influence this ratio.
Debt to Total Assets
(Debt/ Total Assets) x 100
Analyses a company’s financial risk by examining how much of a company’s assets have been
funded by debt. A higher ratio will typically indicate higher risk however comparisons to
industry average are required.
Also known as ‘inventory holding period’ this provides a measure of how long after purchase it
takes a company to convert its inventory into sales. In general, the lower the time the better.
Also known as leverage, measures the proportion of debt and equity used to finance a
company’s assets.
Total Debt to Equity
EBITDA Interest Coverage
Total Debt to EBITDA
(Total Debt/ Net Assets)
(EBITDA/Net Interest)
(Debt/ EBITDA)
Department of Finance and Services – Basic Financial Assessment Report
The higher the ratio, the greater the company’s leverage. It is often thought that those with
higher levels of leverage have greater risk as their liabilities are higher and a lower amount of
equity.
Examines a company’s ability to generate sufficient earnings to pay its interest expense.
Represents the number of times that interest is covered by EBITDA. A ratio of greater than 1
suggests that the company has enough earnings to pay off any interest obligations however a
ratio of at least two is preferred.
Examines a company’s ability to pay off debt, and represents an approximation of the minimum
number of years this would take if all earnings were diverted to debt repayments. A higher ratio
is a warning sign that a company may be unable to repay its debt when it falls due.
22