Sample assessment

Sample Assessment

Acme Company

Contents

Assessment Objective and Scope of WorkSummary of FindingsAnalysisRecommendations

2Confidential & Proprietary

How the Assessment Was Performed

Objectives Assess the current fiscal condition Make recommendations to improve future financial

performance

Scope of Work Collect various financial and operating data about the

company Interview management Analyze data to present findings on past financial

performance Provide recommendations to improve future financial

performance


Summary of Findings

Summary of FindingsFindings are material items that impact the company’s financial

performance. To improve financial performance, management should focus on

these areas.


Focus Area Description

Data Integrity Accuracy of financial data used in the business

Data Visibility Ability to rapidly understand the company’s financial performance on a timely and regular basis

Planning & Measurement

Systematic planning and measurement of performance to drive continuous improvement

Cash Flow Sufficiency of cash flow to fund operations and service debt

Data Integrity

Good data ensures that the business can be properly managed

Data integrity was found to be insufficient in some areas

Some balance sheet account had incorrect balances Sales are recorded improperly for certain products Cost of good sold is understated due to how payroll is

booked


Data Visibility

Good data must be properly organized and presented regularly

Data visibility can be improved in these areas

Chart of accounts is too complex and does not organize data into meaningful categories

Regular management reports are not created, distributed and reviewed

It is too difficult to retrieve management information from certain systems


Planning & Measurement

A systematic approach drives continuous sales and profit improvement

A performance management system is required to drive growth

No monthly budget exists No long-term financial plan in place No performance metrics exist No monthly management close meeting to review

performance


Cash Flow

Monthly cash flow finances growth and service debtCurrent monthly cash flow is insufficient to finance

growth

Operating cash flow increased due to delays in paying vendors

Gross margins are deteriorating Delinquent customer accounts have increased Accounts

Receivable and collections now average over 45 days Payroll has increased more than increases in sales


Analysis

Analysis

Various analysis was performed using data provided by Acme


Analysis Description

Trend 3-year trends in Sales, Gross Profit, Op. Expenses & Net Income

Sensitivity What level of sales is required to generate $100K and $250K of income to the owner?

Ratio Trends in liquidity, leverage and operating ratios

Benchmark Comparison of financial data to peers

3-Year Trend Analysis

2010 2011 2012 $-

$500,000

$1,000,000

$1,500,000

$2,000,000

$2,500,000

$3,000,000

$3,500,000

$4,000,000

$4,500,000

Revenue Gross ProfitOperating Expenses Net Income


Sales increased 36% in 2012.Operating Expenses increased 55%, driving Net Income down 13% vs.

2011.

+36%

+26%

+55%

-13%

Sensitivity Analysis

Acme needs $2.M sales to breakevenCOGS increases with revenue, but operating expenses

are fixed


2012 Breakeven @$100K @$250KREVENUE 4,102,530 100.0% 2,873,000 100.0% 3,073,000 100.0% 3,373,000 100.0%

Cost of Goods Sold 2,051,265 50.0% 1,436,500 50.0% 1,536,500 50.0% 1,686,500 50.0%

GROSS MARGIN 2,051,265 50.0% 1,436,500 50.0% 1,536,500 50.0% 1,686,500 50.0%

Total Expenses 1,436,500 35.0% 1,436,500 50.0% 1,436,500 46.7% 1,436,500 42.6%

NET INCOME 614,765 15.0% - 0.0% 100,000 3.3% 250,000 7.4%

Annual Sales Growth -30.0% -25.1% -17.8%

Liquidity Ratio Analysis


Although collections have improved, Acme has become less liquid over time

RATIO DESCRIPTION 2010 2011 2012Current Ratio 4.20 3.79 3.50 Current Assets / Current Liabilities

Days Sales Outstanding (DSO) 45.10 40.20 46.80 (Accounts Receivable / Sales) * 365

Days Payable Outstanding (DPO) 25.20 35.00 47.80 (Accounts Payable / COGS) * 365

Overall liquidity of company. Higher the ratio, the more liquid the company is.

Average days to collect customer payments. Lower is better.

Average days to pay vendor bills. 30 days is a good standard

Leverage Ratio Analysis

Debt has built up over time but has not yielded higher returns


2011 2012 2013YTD0

0.5

1

1.5

2

2.5

3

3.5

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

18.0%

0.76

1.28

3.22

15.3%

12.1%

3.5%

Year

Deb

t to

Equi

ty R

atio

Retu

rn o

n A

sset

s

Operating Ratio Analysis

Gross and Net Operating Profit Margins are declining over time


2010 2011 20120.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

70.0%

58.5%53.2%

50.0%

18.1% 17.8% 15.0%

Gross Profit % Operating Margin %

Year

Mar

gin

%

Benchmark Analysis

2012 Net Income and Revenue per employee is lower than its peer group


2012 Peer DifferenceREVENUE 4,102,530 100.0% 4,102,530 100.0% - 0.0%

Cost of Goods Sold 2,051,265 50.0% 1,599,987 39.0% 451,278 11.0%

GROSS MARGIN 2,051,265 50.0% 2,502,543 61.0% (451,278) -11.0%

Total Expenses 1,436,500 35.0% 1,641,012 40.0% (204,512) -5.0%

NET INCOME 614,765 15.0% 861,531 21.0% (246,766) -6.0%

REVENUE / EMP. 141,467 186,479 (45,012)

Recommendations

Recommendations

Improve monthly cash flow by focusing on four areas

1. Enhance financial system to provide a platform for growth

2. Implement a margin improvement plan3. Implement a performance management system4. Implement a debt reduction plan


Enhance Financial System

Update Chart of Accounts Clean up incorrect balances and transactions Implement monthly close process Implement accounting best practices & procedures


Get better data to make better decisions.Increase cash flow, support growth.

Implement Margin Improvement Plan

Update job costing system to better track actual performance

Review operating costs and identify areas to save money Benchmark operating processes and recommend

efficiencies Lead generation Time to close sale Time to deliver service Parts procurement & inventory


Focus on specific areas controllable by Acmethat immediately increase monthly cash flow

Implement Performance Management System

Develop a monthly budget and 3-year plan Set specific performance metrics that drive growth Implement weekly management dashboards Track actual vs. budget as part of monthly close Align compensation with performance measures


Best way to grow is to create a plan and measure progress regularly

Implement Debt Reduction Plan

Grow sales but keep operating expense levels flat Implement a method to evaluate ROI of investment

decisions Set hurdle rates for each project – a rate of return that must be

achieved or the company will not submit a bid Evaluate refinancing options

Swap high interest debt for low interest loans


Reduce debt levels to increase sustainability, provide funding for growth

Sample assessment

Business

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