#13: Financial strength and stability

Over the past few articles, we have been looking at how to build and develop a business successfully, using skills both old and new. Many of these have been key characteristics, such as strategic planning, and managing implementation risk.

If you have embarked on a transformation process to move your business forward, one of the outcomes should be that the business achieves a different level of financial resilience.

One way to assess the extent to which this has been achieved is to evaluate how your business would stack up, from a financial standpoint, in terms of being attractive to a potential buyer. There are other types of due diligence which would be undertaken, notably around your market, product or service, management, and your people. But for the moment let’s stay focused on financial aspects, with a couple of risk factors thrown in.

I would suggest that you consider the following areas of financial analysis:

1.  Are the following on an upward trajectory:                                                                                                                      – Turnover                                                                                                                                                                – Maintainable earnings (profit excluding exceptional items)                                                                                    – Cash flow

2. What is the quality of the revenue stream:                                                                                                                        – Transaction based or ongoing                                                                                                                                – Repeat business

3. Is there a strong balance sheet?
4. In particular, how heavy geared is the business (ration of debt to equity), and how liquid is it (in its simplest         form can all short-term creditors be funded out of cash and debtors)?
5. Is there a reliance on a small number of customers?
6. Is there a reliance on one supplier or service provider?
7. Is there any liability to past customers?

It may be useful to go back say three years, and score yourself not just on where you are now, but where you have come from. Depending upon what you discover you can then move on with confidence or take corrective action where required.

In my next article, we will focus on the choices you may now be facing as your business continues to develop and grow, and how to tackle these effectively.