Business Evaluations: A Financial Health Check

Businesses experience different phases and challenges in their lifecycle, such as economic downturns, mismanagement, regulatory challenges, or unforeseen external events.

Conducting a comprehensive evaluation or “health check” is critical in determining how your business is performing. This process involves analysing profitability, cash flow, compliance, and overall operational health.

Does my business need a health check?

If your business isn’t achieving the results you expect despite the time, effort, and resources you’re investing, it may be a sign that it’s time for a business health check.

A thorough health check helps you understand where your business might be underperforming, allows you to make informed decisions, and enables you to implement strategies for improvement. Regular assessments can keep your business on track and ensure long-term success.

Key Components of a Business Health Check

1. Profitability Analysis

Profitability is a core indicator of a business’s long-term viability. Profitability issues usually stem from declining revenue, escalating costs, or inefficiencies.

How to Evaluate Profitability:

• Review financial statements: look at historical income statements to identify revenue trends, operating expenses, and profit margins.
• Analyse profit margins: focus on gross, operating, and net profit margins to identify where costs are impacting profitability.
• Benchmark performance: compare the entity’s financial performance against industry benchmarks to understand whether the challenges are entity-specific or industry-wide.

Key Questions:

• Is the company generating enough revenue to cover its costs?
• Can costs be reduced to improve profitability?
• Are there inefficiencies eroding profits?

2. Cash Flow Evaluation

While profitability focuses on long-term success, cash flow measures whether the entity can meet immediate financial obligations, a critical element for survival.

How to Evaluate Cash Flow:

• Examine the cash flow statement: break it down into operating, investing, and financing activities to see if the business is generating cash from its core operations.
• Focus on operating cash flow: this reveals how much cash is coming from everyday operations, highlighting whether the company can sustain itself without external financing.
• Analyse liquidity ratios: Use ratios like the current and quick ratios to assess whether the business can cover its short-term liabilities.

Key Questions:

• Is the business generating positive cash flow from operations?
• Are liquidity issues threatening solvency?
• Can working capital be improved to ease cash flow pressures?

3. Debt and Solvency Analysis

Businesses can often have significant debt, which may be a core issue. A thorough review of the entity’s debt load and solvency is necessary to evaluate whether it can manage its obligations.

How to Evaluate Debt and Solvency:

• Review the balance sheet: compare total liabilities with assets to assess solvency.
• Examine debt ratios: ratios such as debt-to-equity and interest coverage provide insight into whether the entity is overleveraged.
• Consider refinancing options: explore opportunities to restructure or refinance debt to ease cash flow.

Key Questions:

• Is the debt load sustainable?
• Can the company cover its liabilities with its assets?
• Are refinancing or debt restructuring options available?

4. Compliance review

Businesses may face regulatory or legal issues that further exacerbate their financial challenges.

How to Evaluate Compliance:

• Review tax obligations: ensure taxes are up to date to avoid penalties and interest.
• Check regulatory compliance: make sure the business complies with industry-specific regulations.

Key Questions:

• Is the company compliant with tax and regulatory requirements?

Conclusion

A thorough evaluation of a business involves analysing its profitability, cash flow, debt, compliance, management, and market position. A business health check helps owners understand why the business is not achieving expected results. provides clear insights into the business’s current condition and offers a way forward for making informed decisions about its future.

If you think your business needs a financial health check, contact your Johnsons MME advisor today.