Business Health Check - How Your Bank Can Partner with You
Not surprisingly there are some relatively simple ways business owners can consider to boost their business’s performance and their banker is often well placed to provide guidance and be a sounding board.
The following business health check is a short guide to help focus on key areas of cash, profitability and management, and to help you identify areas for focus within your business.
Fit for today, fit for tomorrow is a good catch cry…
It’s important to understand the key drivers of performance to give your business the best chance of long-term success. In the current environment, every business will be questioning what they need to do in order to stay successful. But what are the key questions you should be asking?
We have experience of working with many many businesses, each with different financial needs, and we have found that many of the problems affecting business performance fall into one, or a combination, of the following areas:
The following is a series of ‘health check questions or prompters’ to help you consider each of these three key areas and undertake a self-assessment of your business’s current performance.
The way a business manages cash in the short term is an essential part of ensuring long-term success. Cash-related issues are one of the most common reasons for most businesses experiencing financial problems. No matter what type or size of business you have, it pays to make your cash work as hard as possible.
It’s important to operate tight cash management – stopping the unnecessary outflow of cash from the business and taking advantage of any available surplus. Where there are difficulties in matching the inflow and outflow of cash, identifying what can be retained in the business to give a convenient ‘breathing space’ should be considered. This will give time to assess the options available and, if required, to secure a long-term finance solution.
The key principles of cash management are as follows:
- Cash is ‘king’:Get closer to the cash, understand the cashflow, take greater control and improve your ability to forecast your cash accurately
- Communication and predictability: Open dialogue is essential to maintain the confidence of the bank and other stakeholders
- Accountability: Implement actions that have been agreed and monitor them closely to ensure that you deliver what everyone is expecting
Consider the following questions and prompters and discuss with your banker…
Do you prepare a short-term cashflow?
Do you have a track record of forecasting accurately?
Have you tried to negotiate extended terms with creditors? (If you have a good trading record, they may agree – but ensure you keep to any revised terms).
Are your debtor/creditor days or stock turn as good as your competitors or the industry norm?
Do you have any restrictions on the number of people who can make purchases or make payments? (To enable tighter control of cash, it may be worth centralising controls for cash management, invoicing, purchasing, authorising payments etc).
Are you collecting your debts as quickly and efficiently as possible? (Consider early settlement discounts and issuing invoices earlier. Switching to invoice discounting or factoring may make it possible to release more cash from your debtors).
Do you focus sufficient effort on dealing with disputed debts so they are settled and collected as quickly as possible?
Have you asked any key customers to pay earlier – even if only for a certain period of time?
Can you operate on lower inventory levels and have you considered liquidating stock to raise cash?
Have you tried to free any ‘trapped’ cash (eg, in other non-productive assets)?
Have you asked the shareholders or other investors to support the business through an injection of cash?
Have you reviewed your capital expenditure policy to remove any non-essential spending? (Are there any loss-making units/outlets that can be closed? (Note that this is often cash negative in the short term due to redundancy and other exit costs etc.)
It’s important to understand the profitability of your business so you can identify what’s working well and what’s not, so you can make informed decisions.
Short-term cash problems will often be caused by underlying profitability issues in the medium to longer term. A particular part of the business may be under performing and so it’s important to identify problem areas and make informed decisions. Once you have analysed the profitability in detail, it may be necessary to refocus on core business activities in order to return to profitability. When analysing each activity, consideration should be given to:
- Sales strategy
- Margin improvements
- Cost reductions
- Management information and key performance indicators (KPI’s)
Consider the following questions and prompters to identify any profitability issues for your business and discuss with your banker.
Do you understand the profitability of each part of your business?
Are all of your business units/outlets making profits and performing well?
Are you implementing a plan to turn around or close underperforming units/outlets?
Do you understand and compare your trading performance to your competitors/peer group?
Do you know your profitability by product, service or customer?
Do you review the price you charge for your products or services on a regular basis?
Do you have a good monitoring system?
Do your systems tell you exactly which products or services are selling as soon as possible after the sale takes place?
Do you continually and carefully monitor all your costs?
Do you regularly review and seek opportunities to reduce costs?
Are your management information and KPI’s sufficient to enable you to make fully informed/timely decisions about the future of the business?
Is the business careful/prudent with its expenditure?
It is generally accepted that management strength is key to running a successful business. There are various ways of assessing people or management.
It is vital to have a strong management team. Successful businesses normally expect top management to display the following attributes:
• Ability to measure results
• Ability to set objectives
• Organisational skills
• Communication skills
• Ability to develop people, including themselves.
A helpful list of some of the key questions and prompters relevant to most types of business are:
Is the management structure and functional expertise appropriate for the size and complexity of your business?
Is there balance within management’s approach in terms of level of participation and authority?
Does management have the necessary communication skills both internally and externally?
Are there effective/fully involved non-executives perhaps and/or a board of management?
Is management receptive to outside advice from say advisors, consultants and bankers (as necessary)?
Especially for a family business, is there sufficient depth of experience, external influence and challenge in key roles?
Does management have knowledge of the forces affecting their industry/market and do they react to these effectively?
Is there evidence of say new service initiatives?
Does the senior team adequately contribute to and understand the strategy? Is it communicated to all staff? Is it regularly reviewed?
Does management have a business plan to achieve the vision and is it appropriate for the size/type of business? Is it sufficiently task focused? Is actual performance compared to the plan?
Have they analysed the risks? What if there is a shortfall in sales? Have they considered applying sensitivity analysis to their budget?
Is there a balance between optimism and realism?
Have past plans/budgets been achieved?
Has management got a mix of experience, including managing a company going through a major change or uncertain times?
Does management have the necessary tenacity/ability to take tough decisions to turn the business around if needed?
Are they open and co-operative with their bank when discussing and addressing the issues they face?
Is management information and the way it is used adequate for the business?
Is management information on time and relevant?
Succession issues can be a problem. Has the business considered and planned for these issues?
Is management committed to the company and delivering the plan?
While this may seem a long list of questions and prompters, there are many more that your banker would be willing and interested to discuss with you – a true banking partnership lays a solid foundation for mutually beneficial outcomes for all to be achieved.
Ian Watt is the Senior Business Development Manager - Franchising, NSW & ACT at Westpac. He specialises in the franchise sector, working closely and assisting many franchise brands grow and maintain their network. He holds a Bachelor of Business degree and is a qualified CPA.
Westpac continues its long-term commitment to franchising in Australia through a national network of franchise specialist business bankers who are able to deal with the specific needs of the franchise sector.
Contact Ian at: