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Incorporating end-of-year tax planning with a thorough business health assessment is key for gaining a comprehensive understanding of your client’s financial standing and prospects. While end-of-year financial statements are invaluable tools, they often provide only a surface-level view of a business’s financial health. These statements typically focus on key metrics such as profit and loss, balance sheets, and cash flow movements over the preceding 12-month period. However, they may not capture the full spectrum of factors influencing a business’s performance.
One limitation of relying solely on end-of-year statements is the potential distortion caused by strategies aimed at tax optimisation. Businesses may defer income or fast-track expenses to achieve a particular tax position, which can skew financial metrics for a given period. Consequently, these statements may not accurately reflect the true operational performance and financial health of your client’s business.
To obtain a more holistic perspective, consider additional indicators beyond the traditional financial statements:
- Long-term Trends: Analyse trends spanning multiple financial periods to identify patterns and shifts in the business’s performance. This longitudinal analysis can offer insights into the trajectory of the company and highlight areas of strength or concern.
- Actual vs. Forecasted Performance: Compare actual financial outcomes with previously forecasted figures to assess the accuracy of your projections and identify discrepancies. Understanding the variance between projections and actual results can inform future forecasting and strategic decision-making.
- Ratio Analysis: Conduct a thorough ratio analysis to compare the financial metrics against industry benchmarks and peers. This comparative analysis can reveal how the business measures up against competitors and identify areas for improvement or optimisation.
- Non-Financial Indicators: Consider non-financial indicators such as customer satisfaction levels, lead conversion rates, and employee engagement metrics. These qualitative measures provide valuable insights into customer sentiment, market perception, and operational efficiency, which can impact long-term sustainability and growth.
Accessing benchmarking data from commercial providers or government sources, such as the Australian Taxation Office (ATO), can further enrich your analysis by providing industry-specific benchmarks and performance standards.
To begin evaluating the financial position, ensure that the financial statements are up to date and accurately reflect the business’s transactions and financial performance. Inadequate or incomplete records can hinder your ability to assess the financial position accurately and may raise concerns about compliance and solvency.
For businesses facing financial distress or insolvency risks, consider utilising tools such as the business viability assessment tool provided by the ATO. This tool evaluates various indicators, including gross margin, cash flow, asset and liability positions, liquidity, and funding availability, to assess the business’s viability and ability to meet its financial obligations. https://www.ato.gov.au/calculators-and-tools/businesses-viability-assessment-tool
If your assessment indicates potential challenges in meeting financial commitments explore options such as:
- negotiating payment schedules,
- chasing outstanding debts,
- seeking government grants,
- selling obsolete stock or non-productive assets,
- liquidating investments, or
- exploring refinancing options with finance brokers or bankers. (sometimes you may be able to obtain a lower interest rate or lower the monthly payment)
- Introduce personal funds into the business – care should be taken with this as you don’t want to put money into a business that not viable and risk losing more money.
DETERMINE YOUR CLIENTS IMMEDIATE CASH FLOW COMMITMENTS
Poor cash flow is a common reason for small business failure. While cash flow issues may stem from various underlying causes, effective cash flow forecasting can help navigate downturns and seize opportunities.
- Develop a 13-Week Cash Flow Forecast: Implement a detailed cash flow forecast covering the next 13 weeks to monitor cash inflows from debtors and outflows for creditor payments, including employee entitlements and tax obligations. This forward-looking forecast can help anticipate cash flow gaps and prioritise payments to avoid penalties or insolvency risks.
- Debtor Management: Focus on optimising the accounts receivable process to expedite cash collection and minimise outstanding invoices. Implement robust debtor management practices, including timely invoicing, proactive follow-up on overdue payments, and clear credit terms to improve cash flow efficiency.
- Expense Management and Budgeting: Review the operating expenses and identify opportunities to reduce overhead costs without compromising operational effectiveness. Develop a comprehensive budget that aligns with revenue projections and business objectives, allowing to track performance against targets and adjust expenditure priorities as needed.
By proactively managing your client’s financial position and cash flow commitments, you can enhance the business’s resilience, mitigate risks, and position your client for sustainable growth and success in the long term.
If you have a client facing financial difficulties and needs to turn things around, contact us today to set up a meeting. We’re experts in financial restructuring and in the other turnaround strategies needed to get a business back on track.