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Department of Finance and Services – Basic Financial Assessment Report Department of Finance and Services Basic Financial Capacity Assessment Template.

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Presentation on theme: "Department of Finance and Services – Basic Financial Assessment Report Department of Finance and Services Basic Financial Capacity Assessment Template."— Presentation transcript:

1 Department of Finance and Services – Basic Financial Assessment Report Department of Finance and Services Basic Financial Capacity Assessment Template [Contracting party] January 2013 ABN [xxx xxx xxx]

2 Department of Finance and Services – Basic Financial Assessment Report CriteriaConclusionSupporting evidence Financial capacity Dept. criteria [Acceptable / unacceptable AND list any specific conditions, e.g. limit to contract size of $XXX ] The proposed contract with [Contractor] falls [within / outside] the departments three financial capacity criteria. Financial performance & liquidity [Acceptable / unacceptable or other, AND material specific conditions impacting the conclusion] To include summary of key factors supporting final conclusion. Other considerations [Acceptable / unacceptable or other appropriate 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 Executive Summary 2 Recommendations and Conclusions 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).

3 Department of Finance and Services – Basic Financial Assessment Report Financial Assessment Matrix 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 Contract summary & assessment criteria Contract size< $1.0m< $10.0m> $10.0m Contractor revenue n/a< $25.0m> $25.0m< $300.0m> $300.0m Basic Assessment Medium Assessment Comprehensive Assessment Contract/TenderDetails Contract name Contract description / nature Contract size Proposed start date Duration (months) Contract value as % of LTM Revenue Within contractors size capability (Y/N) Contract Summary DFS Assessment Criteria 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. The DFS 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. 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. 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).

4 Department of Finance and Services – Basic Financial Assessment Report Executive Summary 4 Understanding the contractor’s ownership and structure Analysis Area Questions / Issues to be ConsideredRatingComments & Mitigating Actions Entity identity 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. Wider corporate tree 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 inter- company loans, guarantees, cross-collateralised security or direct security. Major shareholders/ partners / directors Are owners and/or directors of good reputation? Do they add potential additional financial risk? 1.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. Risk Definitions: Low Risk Medium Risk High Risk [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]

5 Department of Finance and Services – Basic Financial Assessment Report Executive Summary 5 Understanding the contractor’s ownership and structure Analysis Area Questions / Issues to be ConsideredRatingComments & Mitigating Actions Executive management Are key management capable of delivering the contract? Consider tenure, experience in industry, experience as a manager. Summarise key management’s 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. Key man risk 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. Core offerings and markets 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. Risk Definitions: Low Risk Medium Risk High Risk

6 Department of Finance and Services – Basic Financial Assessment Report Executive Summary 6 Understanding the contractor’s business Analysis Area Questions / Issues to be ConsideredRatingComments & Mitigating Actions Key customers 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 contractor’s 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 contractor’s 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. Key suppliers and supply chain 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 contractor’s 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. Risk Definitions: Low Risk Medium Risk High Risk

7 Department of Finance and Services – Basic Financial Assessment Report Executive Summary 7 Understanding the contractor’s business Analysis Area Questions / Issues to be ConsideredRatingComments & Mitigating Actions 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? Summarise history of any significant claims and any unsettled outstanding claims. Regulatory environment 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. New markets and products 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 contractor’s 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. Risk Definitions: Low Risk Medium Risk High Risk

8 Department of Finance and Services – Basic Financial Assessment Report Executive Summary 8 Understanding the contractor’s financial capacity Analysis AreaQuestions / Issues to be ConsideredRatingComments & Mitigating Actions Basic profitability 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? 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). 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. Liquidity measures 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. 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? 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. Risk Definitions: Low Risk Medium Risk High Risk

9 Department of Finance and Services – Basic Financial Assessment Report Executive Summary 9 Understanding the contractor’s financial capacity Analysis AreaQuestions / Issues to be ConsideredRatingComments & Mitigating Actions Significance of the proposed contract to the contractor 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. Financier relationship, debt facility headroom, covenants, term 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. Revenue / margin / working cap sensitivity 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. 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. Risk Definitions: Low Risk Medium Risk High Risk

10 Department of Finance and Services – Basic Financial Assessment Report 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 Business description Refer to industry and subsector of industry in which contractor operates and typical contract size. Example wording: Smith Group is a construction contractor specialising in NSW housing developments with contracts ranging between $5- $15m. Group name / Head company [Contractor] Group Holdings Pty Ltd Wider Corporate Tree 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 contractor’s financing was obtained via a related entity loan, where a contractor’s future cash flows rely on collection of related party receivables, where the contractor’s 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. Ownership State significant shareholders and effective holding % 10 Understanding the contractor’s ownership and structure [Contractor] Group Holdings Pty Ltd XX XX Services Pty Ltd XX XX Pty Ltd [Contractor] Pty Ltd XX X% [ ] family trusts and other holding structures X% 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. [ ] Institutional shareholders XX% Float (if applicable) [Cross Guarantee $Xm] XX%

11 Department of Finance and Services – Basic Financial Assessment Report Ownership and Structure History (source from discussions with management and company website) 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. Example wording: $[ ]m warehouse construction in Western Sydney on behalf of Listed Company PLC (2010) Number of employees Break down of total employees between full-time, part-time and contractors. Example wording: [ x ] Full time employees [ x ] Contractors 11 Understanding the contractor’s ownership and structure Management Structure (if relevant) [Sales Manager] [Executive Director] [HR Manager] [Marketing Manager] [Management Accountant] [Financial Accountant] [Finance Manager]

12 Department of Finance and Services – Basic Financial Assessment Report 12 Understanding the contractor’s ownership and structure Directors ProfilesManager 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: 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: 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?). Ownership and Structure Factors to consider: Is the Directors / Management’s 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.

13 Department of Finance and Services – Basic Financial Assessment Report Financial Capacity 13 Performance and Profitability Profit & Loss Performance history Commentary should be around profitability and trajectory aimed at identifying; -Trend of revenue (growing or contracting) -How movements have translated to profitability through: -Margin trends (improved or deteriorated) -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: 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. Source: 1) FYXX & FYXX: Audited accounts 2) FYXX: Management accounts (unaudited) [Note: Where recent full year data is not available, financial information presented to include YTD results.]

14 Department of Finance and Services – Basic Financial Assessment Report The contractors business 14 Work on hand & pipeline Current work on hand This section aims to identify projects on hand (being undertaken) by a bidder, their current status, and the extent of secured work remaining. 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. 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] 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? Customer concentration This section aims to identify any apparent over reliance on a limited number of customers and any mitigating factors. 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. Revenue by Customer / Project ($m)FY12% of total Customer 1 Customer 2 Customer 3 Customer 4 Customer 5 Others TOTAL Pipeline Summary [if available]# of bids / opportunities Gross Value $m Historical Win rate Net value $m Bids Submitted[ ] Identified opportunities[ ] Estimated pipeline value[ ]$[ ]m Performance and Profitability

15 Department of Finance and Services – Basic Financial Assessment Report 15 Cash Flow & Liquidity Financial position 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. 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, -issues with collection on a project that may relate to performance or customer liquidity, -unsustainable creditor stretch. Level of debt (consider financing ratio’s above vs. industry averages and whether appear excessive ) and the source of debt (i.e. external lender or related party loans?). Financial Capacity Source: 1) FYXX & FYXX: Audited accounts 2) FYXX: Management accounts (unaudited) 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) -Note any material related party receivables / payables / loans.

16 Department of Finance and Services – Basic Financial Assessment Report 16 Cash Flow & Liquidity Cash flow Financial Capacity Cash flow Commentary should be around cash generation and trajectory aimed at identifying; -Is the business generating cash from operating activities? -What’s the trend (increasing or decreasing)? -Were there any significant borrowings or repayments in the period? -How much CAPEX was made in the period? -The level of net cash flow and resultant headroom vs. facilities available. 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) Debtors and Creditor Ageing This section aims to identify potential debtor recoverability issues and any potential stretch in creditors. 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. Example wording: 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.

17 Department of Finance and Services – Basic Financial Assessment Report 17 Financing facilities Facilities schedule as at [Date] 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 contractor’s relationship with its financier and willingness to provide additional finance 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 Financial Capacity –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.

18 Department of Finance and Services – Basic Financial Assessment Report 18 Profitability Example visual representation of profitability & performance Financial Capacity Include explanatory comments key observations [Charts populated for illustrative purposes only]

19 Department of Finance and Services – Basic Financial Assessment Report Glossary 19 Glossary TermDefinition 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 Australian Securities & Investment Commission (ASIC) is Australia’s corporate, markets and financial services regulator. Capex 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. Cash flow from operations 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 A promise in an indenture, or any other formal debt agreement, that certain activities will or will not be carried out. Creditor A party to whom money is owed by the business. (a.k.a ‘Payables’) Debtor A party that owes the business money. (a.k.a ‘Receivables’) EBIT Earnings before interest and tax (EBIT) is a measure of a company’s profitability, calculated as revenue minus expenses, excluding tax and interest. EBITDA 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. F’cast Abbreviation for forecast.

20 Department of Finance and Services – Basic Financial Assessment Report Glossary 20 Glossary TermDefinition FY Abbreviation for financial year GM% Gross margin (GM%) is a company’s 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 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). Gross Profit A company's revenue minus it’s cost of goods sold. Intangible assets Assets that cannot be physically touched but which provide economic benefit to the owner. Some examples include goodwill, patents & copyrights. Liquidity Liquidity refers to the ability to convert assets to cash quickly and easily with limited if any loss in value. LTM Abbreviation for last twelve months. NPBT Residual profit after all expenses with the exception of tax. Net Profit/ NPAT 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. Net Cash Flow All cash inflows (receipts) less all cash outflows (payments). Net Interest Net interest in the profit & loss statement is calculated as interest income less interest expense. NTA Net tangible assets (NTA) is calculated as total assets less any intangibles, less total liabilities. Net Working Capital Calculated as a company’s current assets less current liabilities. Often used as a measure of a company’s liquidity. WIP 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.

21 Department of Finance and Services – Basic Financial Assessment Report Glossary 21 Glossary RatioCalculationDefinition 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 company’s 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 company’s 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 Ratio(Current Assets/ Current Liabilities) A very common liquidity measure to assess a company’s 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. Days Debtors(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.

22 Department of Finance and Services – Basic Financial Assessment Report Glossary 22 Glossary RatioCalculationDefinition 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 company’s 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 company’s 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 company’s 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 company’s financial risk by examining how much of a company’s assets have been funded by debt. A higher ratio will typically indicate higher risk however comparisons to industry average are required. Total Debt to Equity(Total Debt/ Net Assets) Also known as leverage, measures the proportion of debt and equity used to finance a company’s assets. The higher the ratio, the greater the company’s 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 company’s 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 company’s 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.


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