Department of Finance, Services and Innovation Basic Financial Capacity Assessment Template [Contracting party] March 2016 ABN [xxx xxx xxx] Department of Finance, Services and Innovation 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, Services and Innovation 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 DFSI 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 Criteria: Critical Value (based on $[ ]m contract [Contractor] Pty Ltd Criteria m et? Working Capital Current Ratio >5% contract value >10% of contract value >1 > $[ ] > $[ ] >1 $[ ] $[ ]  (Yes/No) (Yes/No) (Yes/No) Department of Finance, Services and Innovation Basic Financial Assessment Report n/a < $25.0m > $10.0m > $25.0m < $300.0m > $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). DFSI Assessment Criteria NTA < $10.0m 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 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 contractors ownership and structure Analysis Area Entity identity Questions / Issues to be Considered Rating Comments & Mitigating Actions Is the contractor a legal entity? Is the trading entity and corporate entity you are dealing with the same? State contracting entity name. Confirm if the contracting entity is the same entity as that which will provide the service. 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. 2. Note. The related party relationship risk could impact the group through intercompany loans, guarantees, cross-collateralised security or direct security. Are owners and/or directors of good reputation? Do they add potential additional financial risk? 1. Wider corporate tree The following searches should be completed on all Directors, Key Management, major shareholders (those with significant influence), besides the entity name: 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 2. 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. Major shareholders/ partners / directors Risk Definitions: Low Risk
Medium Risk High Risk Department of Finance, Services and Innovation Basic Financial Assessment Report 4 Executive Summary Understanding the contractors ownership and structure Analysis Area Questions / Issues to be Considered Rating Comments & Mitigating Actions Are key management capable of delivering the contract? Consider tenure, experience in industry, experience as a manager. Summarise key managements experience in projects of a similar nature and size to that proposed. If the extent of relevant experience is questionable, detail any mitigating factors that may mean they still have the capability. 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. 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. Indicators of higher risk could include (but are not limited to): The contractor primarily operates in contracting markets, with little diversification within the business. Executive management Key man risk Core offerings and markets Risk Definitions: Low Risk Medium Risk High Risk Department of Finance, Services and Innovation Basic Financial Assessment Report 5 Executive Summary Understanding the contractors business Analysis Area Questions / Issues to be Considered Rating Comments & Mitigating Actions 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? 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 contractors revenue. This presents two main risks: 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 contractors 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: 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 contractors 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. Key customers Key suppliers and supply chain Risk Definitions: Low Risk Medium Risk High Risk Department of Finance, Services and Innovation Basic Financial Assessment Report 6 Executive Summary Understanding the contractors business Analysis Area Questions / Issues to be Considered Summarise history of any significant claims and any unsettled outstanding claims. Claims and associated contingencies Is there a history of significant claims on projects completed? 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. 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: 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 contractors 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?) 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. Similarly, remaining reliant on existing markets with no diversification may be a high risk strategy if existing markets are in decline. Rating Regulatory environment New markets and products Risk Definitions: Low Risk Medium Risk High Risk Department of Finance, Services and Innovation Basic Financial Assessment Report 7 Comments & Mitigating Actions Executive Summary Understanding the contractors 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. 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). Basic profitability 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 Working capital is steady with debtor and creditor days at acceptable levels. Liquidity measures 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 [include pipeline if information available] 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? Risk Definitions: Low Risk Medium Risk 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. 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. High Risk Department of Finance, Services and Innovation Basic Financial Assessment Report 8 Executive Summary Understanding the contractors financial capacity Analysis Area Significance of the proposed contract to the contractor Financier relationship, debt facility headroom, covenants, term Revenue / margin / working cap sensitivity Questions / Issues to be Considered Rating Comments & Mitigating Actions 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 . 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. 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. 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? 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 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. High Risk Department of Finance, Services and Innovation Basic Financial Assessment Report 9 Ownership and Structure Understanding the contractors ownership and structure Contracting Party [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 Float (if applicable) [ ] family trusts and other holding structures [ ] Institutional shareholders XX% XX% XX% [Contractor] Group Holdings Pty Ltd X% [Contractor] Pty Ltd X% X% XX XX Pty Ltd X% X% X% Business description Example wording: Group name / Head company [Contractor] Group Holdings Pty Ltd [Cross Guarantee XX Services Pty Ltd $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. Wider Corporate Tree
Ownership Department of Finance, Services and Innovation Basic Financial Assessment Report 10 Refer to industry and subsector of industry in which contractor operates and typical contract size. Smith Group is a construction contractor specialising in NSW housing developments with contracts ranging between $5$15m. 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: reliance on related entities for employees, plant or other services required for a contract, where a contractors financing was obtained via a related entity loan, where a contractors future cash flows rely on collection of related party receivables, where the contractors 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 contractors ownership and structure Management Structure (if relevant) [Executive Director] [Finance Manager] [HR Manager] [Marketing Manager] History (source from discussions with management and company website) [Sales Manager] Example wording: [Financial Accountant] Number of employees [Management Accountant] Department of Finance, Services and Innovation Basic Financial Assessment Report Provide a brief summary of significant events in the contractors history including date of formation. List any significant projects the business has completed including a brief description of services, customer details, value, date completed and location. 11 $[ ]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. Example wording: [ x ] Full time employees [ x ] Contractors Ownership and Structure Understanding the contractors ownership and structure Directors Profiles Manager Profiles [Name]
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?). [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 should they leave (i.e. details of succession planning, other contingency plans?). [Name] 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?). [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?). Factors to consider: Is the Directors / Managements 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, Services and Innovation 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 - - - - - - - - - - - - Commentary should be around profitability and trajectory aimed at identifying; - Trend of revenue (growing or contracting) - - - - Performance history Source: 1) FYXX & FYXX: Audited accounts 2) FYXX: Management accounts (unaudited) How movements have translated to profitability through: - Margin trends (improved or deteriorated) - [Note: Where recent full year data is not available, financial information presented to include YTD results.] 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, Services and Innovation 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 Pipeline Summary [if available] Am ount Com pleted - # of bids / opportunities % Com pleted - - Gross Value $m Am ount 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. - Historical Win rate 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.    Identified opportunities    Estimated pipeline value  FY12 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. A high percentage of revenue generated from only a handful of customers suggests possible overreliance. 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. Customer 3 Customer 4 Customer 5 Others TOTAL Department of Finance, Services and Innovation Basic Financial Assessment Report 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 [if available] Net value $m Bids Submitted Revenue by Customer / Project ($m) Current work on hand % Rem aining 14 Cash Flow & Liquidity Financial Capacity Financial position Balance Sheet $ 000's 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) FY10 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 - - Financial position and Liquidity 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) FY12 - - - - - - - - - Relativity of measures e.g. comparison of debtor/creditor days to the contractors general terms or industry parameters and note whether acceptable. Any unusual movements between periods that might reflect; - liquidity pressure,
Note any material related party receivables / payables / loans. Department of Finance, Services and Innovation Basic Financial Assessment Report FY11 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) - FY10 15 - issues with collection on a project that may relate to performance or customer liquidity, - unsustainable creditor stretch. Level of debt (consider financing ratios 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; - Is the business generating cash from operating activities? - - C urrent Totals 1-30 - C reditor ($) C urrent Totals
31-60 - 1-30 - 61-90 - 31-60 - Over 90 - 61-90 - Total - Over 90 - - Total - Days 31.54 30.39 34.18 20 10 0 The level of net cash flow and resultant headroom vs. facilities available. Factors to consider: Comparison of the ageing of debtors / creditors to contractual terms (credit offered to customers and credit received). Creditor balances aged beyond normal trading terms may indicate liquidity pressure or unsustainable credit stretch, whilst aged debtors may indicate recoverability issues. 43.50 40 30 How much CAPEX was made in the period? - Debtors and Creditor Ageing This section aims to identify potential debtor recoverability issues and any potential stretch in creditors. 42.48 41.87 - - Debtor-Creditor Days 50 Were there any significant borrowings or repayments in the period? Factors to consider: Was operating cash flow generated predominantly earnings driven (sustainable) or working capital movement driven (non-sustainable)? How much cash has been extracted as dividends by the businesses owners? Is the amount appropriate and sustainable? For example dividends that exceed say 75% of profit may result in the business being undercapitalised. Was the level of CAPEX one-off in nature or is it recurring? Is CAPEX sufficient to maintain the asset base of the business (Comparison to Depreciation expense)? Interpretation of other movements as to whether favourable or unfavourable in nature. Source: 1) FYXX & FYXX: Audited accounts 2) FYXX: Management accounts (unaudited) Debtor ($) Whats the trend (increasing or decreasing)? -
Example wording: FY10 FY11 Days Debtors FY12 Days Creditors Department of Finance, Services and Innovation 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. 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 contractors relationship with its financier and willingness to provide additional finance Department of Finance, Services and Innovation Basic Financial Assessment Report 17 existence of offers of finance from new financiers whether the business gearing levels are within reasonably acceptable levels indicating capacity to borrow further funds. If financial support is required from shareholders, key considerations are: 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 1,034 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) (34) 270 $ 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% 1,000 $ 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, Services and Innovation 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 Definition Amortisation 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). ASIC Capex Cash flow from operations Australian Securities & Investment Commission (ASIC) is Australias 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 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. Covenant Creditor Debtor EBIT EBITDA Fcast 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 companys 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, Services and Innovation 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 companys 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 its 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 companys current assets less current liabilities. Often used as a measure of a companys 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, Services and Innovation 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 companys 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 companys 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 companys 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, Services and Innovation Basic Financial Assessment Report 21
Glossary Glossary Ratio Calculation Definition Days Creditors (Trade creditors/ Cost of Sales) x 365 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 Inventory (Inventory/ Cost of Sales) x 365 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. Net Working Capital (NWC) (Current Assets-Current Liabilities) Net Working Capital looks at a companys 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 companys 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 companys 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 companys financial risk by examining how much of a companys assets have been funded by debt. A higher ratio will typically indicate higher risk however comparisons to industry average are required. (Total Debt/ Net Assets) Also known as leverage, measures the proportion of debt and equity used to finance a companys assets. The higher the ratio, the greater the companys 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. EBITDA Interest Coverage (EBITDA/Net Interest) Examines a companys 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. Total Debt to EBITDA (Debt/ EBITDA) Examines a companys 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. Total Debt to Equity Department of Finance, Services and Innovation Basic Financial Assessment Report 22