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Issue 0017 Business Health Checks For Your Business

Accountants consulting a clientBusiness health checks for businesses are just as important as health checks for humans.  An annual business health check will enable remedial action to be taken to correct trends which, if left unchecked, could cause business problems in the future.

Accountants, offering business advisory services, offer their clients an annual business health check, so any trends requiring remedial action can be noted.

What’s Involved In A Business Health Check?

The key areas to be examined in a business health check include:

Key Performance Indicators (KPIs)

This enables a comparison of the financial performance in the current period to what was achieved in the previous periods.  It also enables a comparison to be made against budgeted figures.

Break Even Calculation

Every business should know what its break even sales figure is, based on current overheads and gross profit percentage being earned.

Financial Analysis

This involves reviewing the financial accounts in areas such as:

  • working capital evaluation;
  • investment in debtors, stock, work in progress; and
  • the amount owing to creditors

in this period, as compared to previous periods.

Benchmarking

It’s possible to compare many types of businesses to the ATO’s benchmarks.

There are also commercial organisations which supply benchmarking data, which assists accountants to compare individual businesses against other similar businesses operating in other parts of the country.

What-if Scenario

It’s very interesting to be able to show a small/medium enterprise operator what the effect would be on slightly different figures.  For example:

  • a 2% increase in the number of customers;
  • a 5% increase in repeat visits; and
  • a slightly increased gross profit percentage.

What does this combination generate in additional revenue?

Accountants can assist you to implement this type of strategy, to try to improve your overall financial performance.

Business Valuation

Accountants, offering business advisory services, believe it’s a good idea for the accountant to calculate an annual business valuation for their individual clients and then compare that to the valuation that was calculated for the previous year, so the client can be made aware of the change in valuation (hopefully an improvement) from one year to the next.

Key Performance Indicator Report Preparation

The largest component of the business health check review centres on KPIs.

In the first instance, the accountant will work with you to collect the data required, such as:

  • number of days worked;
  • number of days not able to work due to weather interruptions;
  • customer data;
  • sales (cash sales, credit sales, internet sales);
  • sales dissection into the various departments;
  • hours the business is open;
  • hours the principal or owner worked in the business;
  • hours the employees worked;
  • wages paid to employees;
  • data on the rented property or space occupied by the business;
  • investment in stock;
  • the amount of stock purchased in the previous 12 months;
  • balance sheet figures comprising:
    • debtors
    • work in progress
    • stock
    • bank accounts
    • creditors
    • loan repayments due in the next 12 months
    • long term debt
    • value of assets
  • overall investment in the business;
  • expenses – a list of the expenses that have been incurred during the year;
  • profit and loss account information; and
  • profit for the period.

This type of data will enable an accountant to prepare the KPI report, based on the information the individual small/medium enterprise operator supplied for his/her business.

Some of the KPIs that an accountant will be able to prepare for individual businesses include:

  • sales increase percentage;
  • daily sales;
  • sales per full-time equivalent person;
  • sales per square metre;
  • average sale;
  • average sale per internet transaction;
  • sales dissection into the various products, on a percentage basis;
  • location of customers into postcode areas;
  • sources of inquiries;
  • success of marketing or advertising campaigns;
  • gross profit percentage achieved from the various departments within the business;
  • wages percentage for the various departments within the business;
  • expenses to sales percentage for all of the expense items in the profit and loss account;
  • profit before tax percentage of sales;
  • net profit per square metre of space utilised by the business;
  • staff allocation per owner or principal;
  • productivity percentage for staff;
  • stock turn achieved in the business;
  • debtors’ days outstanding;
  • current ratio;
  • quick ratio;
  • EBIT (Earnings Before Interest and Tax);
  • percentage return on investment in the business;
  • debt to equity ratio; and
  • interest cover.

These KPIs can then be utilised for a comparison of the performance in the current period against that achieved in the previous periods and the business’ budget.

The KPIs can also be utilised for benchmarking the business against other similar businesses in other parts of Australia.  This report can be generated by subscribing to an external benchmark supplier.

The report that an accountant can prepare is a very powerful report for the small/medium enterprise operator, because it shows what the business’ key results were, compared to:

  • the best business category;
  • the average business category; and
  • the poor performing business category.

The accountant will then be able to have a conversation with you, to try to determine strategies to improve the overall performance of your business, so your business will be able to perform at the best practice level as determined by the benchmarks.

Alternatively, you might end up being an ‘outstanding performer’.  That’s great news for you and your team, as it will show the results of the endeavours you and your team have made to improve your business performance.  This also confirms that you’re in the top echelon of the businesses of your type in Australia, as indicated by the benchmark comparisons.

Accountants Can Assist

The types of services described in this article, relating to business health check services, are services accountants, delivering business advisory services to their clients, can and do supply.

If you’re interested in a wider range of services being offered to you, don’t hesitate to have a discussion with your accountant.

However, if your accountant is unable to supply the services to which this article is referring, we’d be happy to assist you by giving an introduction to an accountant, within your location, who can supply these types of services.  Please send an email to with your location and postcode and we will send you the names of accountants within your area, who are offering these types of services.

To assist you in the understanding of the calculation of some of the material contained within a business health check, we have pleasure in providing a ‘Working Capital Evaluation’ form.  Please feel free to utilise this calculation sheet and take it with you for your next discussion with your accountant, so your accountant can review the evaluation of your investment in working capital.

 

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Podcast 'Survival Hints for Small Business'

News, ideas and tips helping small business with strategies to survive and thrive in today's economy.

Episode S017 Business Health Checks For Your Business

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