BUSINESS

EVALUATION GUIDE
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ISBN 978-0-6487513-2-8

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TABLE OF CONTENTS

INTRODUCTION 4
COMMON EXAMPLES OF KEY BUSINESS DRIVERS 5
EVALUATING PERFORMANCE 5
CASE STUDY: BUNDALONG RETAIL PLANT NURSERY (“BUNDALONG”) 7
CONCLUSION 23
APPENDIX A: BUNDALONG’S FINANCIAL & OPERATIONAL DATA 24
APPENDIX B:
31
CHECKLIST OF SUGGESTED INFORMATION SOURCES FOR BUSINESS EVALUATION
APPENDIX C:
32
EXAMPLE OF A TEMPLATE FOR BUSINESS EVALUATION
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INTRODUCTION

It is crucial to regularly review how your business Continuous evaluation of your business’ performance
is progressing, identify how you can make the most informs you of what works and what does not work.
of your market position, decide where to take your Ongoing assessment also helps you determine if
business next and what you may need to do to your business is ready to grow or change direction,
get there. including entering new markets, and what you have
to do to achieve that.
This guide is the first in a three-part series providing
guidance on how to: Before undertaking an evaluation, it is important to
have a detailed understanding of how the business
• assess your business performance
operates and what the key drivers for the business are
• identify your strengths and areas for improvement (see below chart of examples of key business drivers).
• implement the improvements you have identified. This will help develop a more structured and meaningful
evaluation. However, there is no standard template to
Evaluating business performance will give you evaluate a business – every business is unique and the
much of the information you need to determine: key drivers for each business will vary.
• how well the business is performing You may not be able to undertake the business evaluation
• whether the business is making the most of on your own. Good businesses rely on expert advice,
its opportunities so involve your professional advisers and key personnel
(e.g. your management team and senior staff) to make
• if the business plan remains relevant your review more effective.
• if the business is moving in the direction This guide is intended to help business owners,
you want it to go managers, accountants and other business advisors
• if the business is becoming unresponsive implement a business performance evaluation method
to market demands. for their business (or the client’s business).
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COMMON EXAMPLES OF KEY BUSINESS DRIVERS

Business drivers are the inputs and activities that drive the operational and financial result of a business.
Some examples include the size of the sales force, the price of products sold and the volume of products sold.

Key Business Drivers

Risk
Planning Efficiency Profitability Management Innovation

Strategic Productivity Assets Sales Expenses Internal

Working
Financial Technology Price Fixed External
Capital

Capital
Staff Volume Variable
Investment

Customers Supplier

EVALUATING PERFORMANCE

As part of evaluating your business,

you should look at:
• Your market performance and direction • Financial matters – how your business is financed,
– how strong are your sales results, what are the levels of retained profit, the sales income generated
characteristics of your current market and how and sales flow.
might that evolve?
•Y
 our organisation and your people
• Your products and services – consider how long – consider the skills of your staff, their training
your existing products or services will meet your and development needs as well as your
customer needs and any plans for renewal? organisational structure.
• Operational matters – are your premises, processes • Your strategic plan – consider whether the current
and technologies meeting your needs and the needs business operations are on track to achieve the plan?
of customers? Consider if there any internal issues
that are holding your business back?
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SETTING OR RESETTING YOUR BUSINESS STRATEGY

Having a clear business strategy will allow you to effectively assess business performance.
In setting or reassessing your strategy, ask:
• What do I want to achieve in my business?
• What are my key measures of success?
• Am I satisfied with the current performance of my business – is it meeting my expected return on
investment and am I happy running the business?
• What do I want my business to be doing in three to five years? What are my measures for success at that time?
• How do I intend to get my business from where it is today to where I want it to be?
• Do I have the right products or services to achieve my objectives?
• Which markets do I want my business to compete in? What does my business have to do to
effectively compete in those markets?
• What do my current and future competitors do better than my business? What does my business do better
than them?
• What external factors may affect my business? Consider the political, economic, social,
technological and environmental factors.
• What skills, assets, finance, networks and technology do I need to compete?
• Do I have the right team, culture and technology to help me take the business where I want it to go?
• If I don’t have access to the resources required, how do I get access or adapt my business?
• Can I break down my measures of success into key performance indicators?
• Contact your banker to learn about loan refinancing options (sometimes you may be able to
obtain a lower interest rate or lower the monthly payment).

REVIEWING PLANS, BUDGETS AND FORECASTS

All business evaluations should include a review not only of the financial aspects of the budgets and forecasts,
but also how closely they support the strategic plan.
The evaluation should consider:
• the frequency of the preparation of a strategic plan, budget and forecasts (while budgets and forecasts
should be done regularly, regular strategic plans may be counterproductive)
• the assumptions that have been used in developing the plan, budgets and forecasts, including the reliability
of the assumptions
• the authorisation process of the budgets and forecasts, such as whether the forecasts are approved by
the owner or board
• the reporting mechanisms used to track the implementation of the strategic plan, and how budgets versus
actuals are reported and monitored.
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CASE STUDY:
BUNDALONG RETAIL PLANT NURSERY (“BUNDALONG”)

To illustrate how a business evaluation model is developed, a case study is included in this guide.
The case study provides an overview of the key drivers of a retail plant nursery.

The financial statements of Bundalong are included in the Appendix A.

BACKGROUND Note: You may want to collect additional information, as

is appropriate and available from your business, especially
Bundalong retail plant nursery is situated in a rural town
its business plan.
which has a population of approximately 38,000 residents.
The nursery has been operating for 15 years and in the The following includes general guidance on different
past few years has been recording operational losses. aspects of business evaluation and demonstrates
To understand why, and to identify what could be done the application of those principles using information
in response, a business evaluation was undertaken. from Bundalong.

For this purpose, the following information

FINANCIAL PERFORMANCE REVIEW
was collected:
Start with evaluating the business’ current financial
• Financial statements1: Ideally you should collect
performance against its past performance. A comparative
financial statements for the past three years, including
analysis such as this will shed light on trends which can be
the Profit & Loss Statement, Balance Sheet, Cash Flow
used to inform reactions to such trends. There are four main
Statement, and
areas of financial performance that should be evaluated:
any budgets/forecasts available.2 However, in
Bundalong’s case, the business owners only had a • Cash flow and liquidity
Profit & Loss statement and Balance Sheet for the
• Solvency
past two years; no cash flow statement and no
budgets/forecasts. • Operating efficiency/productivity

• Documented policies: you should collect or create • Profitability.

policies on key operational areas e.g. mark-up and
pricing, procurement / buying, stock management,
internal controls, staffing and rostering.
• The organisation chart: this should also include
job descriptions
• Compliance documents: e.g. tax returns, bank loan
agreements, leasing agreements and accreditation
policies.
• Industry information3: which is both financial
and industry-specific information, i.e. benchmarks.

1
I nformation from financial statements are historical. Thus, when analysing historical information, ensure the analysis is undertaken close to the preparation
date to enhance the information’s utility.
2
This should also include the assumptions that have been used to develop the budget
3
When using financial information remember that there are a variety of accounting methods that can be applied to recording financial information.
When performing comparisons, ensure the data has been prepared on the same basis for a meaningful comparison.
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CASH FLOW AND LIQUIDITY

Cash is key when running a business so when you measure the success of your business, start with how much cash it is
generating.

Cashflow forecast The cashflow forecast is obtained by calculating opening bank balances plus all receipts for
the period less all payments for the period. The period can be as short as weekly, however
more commonly a cashflow forecast period is by month. Businesses experiencing cash flow
difficulty should do their forecasting more frequently.
Description A cashflow forecast is a very important tool for business as it provides information on future
cash resources and how they will be applied to the business operations. Cashflow forecasting
is an integral part of business planning and indicates any additional funding needs of the
business in advance (so that the business can address such potential gaps).

Use The forecast will predict the ability of your business to create the cash necessary for expansion
or to support the operations of the business. It will also indicate any cashflow gaps the
business may experience – periods when cash outflows exceed cash inflows.

In Bundalong’s case, they had not prepared a cashflow forecast and therefore don’t have good visibility of how much
money is going in and out of the business.
Liquidity is the amount of cash and easily-convertible-to-cash assets a business owns to manage its short-term debt
obligations. The three most common measurements for liquidity are the current ratio, the quick ratio (also known as the
acid test) and the working capital to total sales.

Current ratio Total current assets

Total current liabilities
Description One of the most common measures of financial strength, the current ratio measures whether
the business has enough current assets to meet its debts that fall due with
a margin of safety.

Use A generally acceptable current ratio is 2:1; however, this will depend on the nature of the
industry and the form of its current assets and liabilities. For example, the business may
have current assets made up predominantly of cash and would therefore survive with
a relatively lower ratio.

Quick (acid) ratio Total current assets less stock on hand

Total current liabilities less bank overdraft
Description Quick (acid) ratio is one of the best measures of liquidity. By excluding inventories,
which could take some time to turn into cash unless the price is discounted,
this calculation concentrates on real, liquid assets.

Use It helps answer the question: If the business does not receive income for a period, can it
meet its current obligations with the readily convertible “quick” funds on hand? A quick ratio
lower than 1.0 is a warning signal, as it indicates that current liabilities exceeds current assets.
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Working capital Total current assets less total current liabilities

to total sales Total sales
Description Working capital to total sales provides an indication of how much working capital per dollar
of sales the business should be holding.

Use Analysis of this ratio must consider the type of trading the business is undertaking to
provide any meaningful interpretation. For example, a business that sells a lot of low-cost
items and cycles through stock quickly (such as a café) may only need 10 per cent to 15 per
cent of working capital per dollar of sales. A manufacturer of heavy machinery and high-priced
items with a slower stock turnover may require 20 per cent to 25 per cent working capital
per dollar of sales.

BUNDALONG’S CASHFLOW AND LIQUIDITY MEASURES

Working Capital
Cashflow forecast Current ratio Quick (acid) ratio
to Sales ratio
Current year No cashflow 1.64 0.54 0.12
forecast recorded
Previous year 3.72 2.15 0.47

The ratios show that Bundalong’s liquidity has deteriorated from the last year to the current year. It can be seen from the
company’s balance sheet that its real cash holdings have substantially decreased from $65,777 to $16,320. Based on the
acid ratio, if the business does not sell its stock on hand, it may not be able to meet its current obligations.

SOLVENCY
Solvency ratios look at a business’s ability to meet its debt obligations on an ongoing basis. The ratio looks at whether
the business’ assets or equity are sufficient to service its long-term debt. The gearing/leverage ratio is generally a good
indicator of a business’s long-term sustainability, measuring debt against owner’s equity. A lower gearing ratio means that
business operations are being financed by the owner and not creditors. What is considered an appropriate gearing ratio
varies between industries but a downward trend over time is generally a good indicator that a business is on an increasingly
solid financial ground. Lenders consider gearing ratios to help determine the borrower’s ability to repay a loan.
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Leverage Total Liabilities

x 100
(gearing) ratio Total Equity
Description The leverage (gearing) ratio indicates the extent to which the business is reliant on debt
financing versus equity to fund the assets of the business. This ratio is widely used by lenders
in banking covenants, therefore another reason to monitor this ratio is to ensure
the business does not breach bank covenants.
The degree of gearing reveals the level of financial risk the business faces. A highly geared or
leveraged business is more susceptible to economic downturns. This is because the business
must continue to meet its operational costs and pay off debts while income falls
in challenging periods.

Use The higher the ratio, the more difficult it will be to obtain further borrowings. A ratio of more
than 50 per cent is typically considered a higher risk, although this is not a hard and fast rule.

Debt to Total Liabilities

x 100
asset ratio Total Assets
Description The debt to asset ratio measures the percentage of assets being financed by liabilities.

Use This ratio should be less than 1, indicating adequacy of total assets to finance all debt.

BUNDALONG’S SOLVENCY MEASURES

Leverage Debt to Asset

Current year 69.55% 41.02%

Previous year 29.37% 22.68%

Bundalong is highly leveraged or geared, however The ratio has nearly doubled from the previous year,
to understand the risk of a 70 per cent gearing ratio, indicating growing financial risk. Typically, businesses
it is important to compare its gearing ratio to others that are not very capital intensive are not expected to
in the same industry. For example, if its main competitor hold too much debt.
shows a gearing ratio of 75 per cent against an industry
Managing debt levels is important and a safe gearing
average of 80 per cent, Bundalong’s 70 per cent ratio
ratio can vary from business to business and is largely
is less risky in comparison. In Bundalong’s case however,
determined by how a business’s debt is managed and
a gearing ratio of 70 per cent is high for the plant nursery
how well the business is performing. In the case of
industry. This ratio is also impacted by Bundalong’s
Bundalong, looking at this ratio along with its liquidity
continual losses.
ratio, shows that the company is not doing well. When
The “debt to asset” ratio indicates that 41 per cent of you refer to the balance sheet in the Appendix, you
the business’s assets is financed by creditors and 59 per notice the movement in the ratio is a result of a drop
cent by the owners. in profit.
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To improve its gearing ratio Bundalong could consider:

• Profit improvement by cost minimisation
• Repaying long term loans
• Injecting more equity

IS DEBT FINANCING BAD?

Debt financing or use of leverage is not necessarily a ‘red flag’. Debt can also help a company expand its operations,
add new products and services and boost profits. Debt also reduces the amount shareholders need to invest
in the business.

EVALUATING SOURCES OF FINANCE

When evaluating solvency, it is important to evaluate your sources of funding to ensure that your business will continue
to have ready access to funding when required. In an evaluation of funding sources, you should check whether:
• you comply with your debt covenants
• you continue to meet the compliance requirements imposed by lenders e.g. reporting
• the debt facility is about to expire
• you have drawn down on the full finance facility or overdrawn on such facilities.

OPERATING EFFICIENCY/PRODUCTIVITY
As a business owner you should aim to achieve the Operating margin is the best indicator of operational
best possible use of all business resources. Efficiency efficiency. This metric provides an indication of how
is about maximising the outputs of the business using well the business is managing its costs. Inventory
the minimal level of inputs. Regular monitoring will turnover is another good measure as it provides
ensure that the business is operating efficiently and ongoing information about the effectiveness of your
that all assets are being used to generate the best stock purchases. A successful business also needs
return on investment. engaged and productive employees executing
goals aligned with your strategic objectives.
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EMPLOYEE PRODUCTIVITY

Total sales to number Total Sales

of sales employees Number of sales employees
Description The total sales to the number of sales employees provides the average dollar value
of sales made by sales employees for a period.
Use Although this measure will only provide the average value of sales per employee,
it is helpful in identifying trends.

Employee sales Total value of sales made by each employee for the period.
Description The employee sales measure is useful to review productivity of each employee.

Use Although this measure will only provide the total value of sales per employee,
it is helpful in determining how productive the business is in generating sales.

ASSET PRODUCTIVITY

Stock turnover Cost of goods sold

Average stock held for the period
(average stock held for the period = opening + closing stock x 0.5)
Description The stock turnover rate indicates the number of times the stock in the business has
turned over.
Use The lower the rate, the longer the stock is taking to turn over. This can provide an indication of
issues with stock management, such as aged or excess stock holding. Funds that are invested
in stock for longer periods can have an adverse impact on liquidity.

Total stock on hand Total stock on hand

x 100
to total assets Total assets
Description The total stock on hand to total assets ratio measures percentage of stock on hand included
in the overall assets of the business.
Use If a high percentage of a business’s assets are tied up in stock and it does not have a relatively
high turnover rate (a high turnover rate would be less than 30 days), it may be a signal that
something is wrong and there could be potential for a stock write-down / off.

Debtor’s days Total debtors X number of days in the analysis period

Total credit sales for the number of days in the analysis period
Description The debtor’s days ratio indicates how promptly accounts from customers
are being collected.
Use When comparing the results of this calculation to the trade terms offered to customers,
this will indicate slow paying customers as well as potential bad debts. The ratio is most
useful when used in conjunction with an aged debtor’s report.
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Aged debtor’s report

Description The aged debtor’s report can be generated by a financial system that lists all outstanding
customer payments by number of days. The list usually provides outstanding payments by
current, 30 days, 60 days, 90 days and over.
Use This report is particularly useful when used with the debtor’s days calculation noted above.
It will provide information on all outstanding customer accounts and can be used to chase
up late payments and identify potential problem customer accounts.

Creditor’s days Total creditors X number of days in the analysis period

Total cost of goods sold for the analysis period
Description The creditor’s days ratio indicates how well accounts payable are being managed.

Use When comparing the results of this calculation to the trade terms offered by suppliers,
the results will provide information on supplier payments. If the analysis highlights that
creditors are being paid on average before agreed payment terms cashflow can be impacted.
If payments to suppliers are excessively slow, there is a possibility that supplier relationships
may be damaged.

Aged creditor’s report

Description The aged creditor’s report can be generated by a financial system that lists all outstanding
payments to suppliers by number of days. The list usually provides outstanding payments
by current, 30 days, 60 days, 90 days and over.
Use This report is particularly useful when used with the creditor’s days calculation noted above.
It will provide information on all outstanding supplier accounts and can help when preparing
forecasted cash payments.

CAPITAL EFFECTIVENESS

Total asset turnover Total sales

Total assets
Description The total asset turnover measures the ability of a business to use its assets to generate sales.

Use The lower the total asset turnover ratio, as compared to historical data for the business and
industry data, the more sluggish the business sales are. This may indicate a problem with
one or more of the asset categories composing total assets – stock, debtors or fixed assets.
Each asset class should be reviewed to determine where a potential problem may lie.

Return on Net profit before tax

assets (ROA) x 100
Total assets
Description The total asset turnover measures the ability of a business to use its assets to generate sales.

Use The lower the total asset turnover ratio, as compared to historical data for the business and
industry data, the more sluggish the business sales are. This may indicate a problem with
one or more of the asset categories composing total assets – stock, debtors or fixed assets.
Each asset class should be reviewed to determine where a potential problem may lie.
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Return on equity/ Net profit before tax

investment (ROI) x 100
Total assets
Description The ROI is perhaps the most important ratio of all as it tells you whether or not the effort put
into the business is returning an appropriate return for the business owner/s, in addition to
achieving the strategic objectives.
Use If the ROI is less than the rate of return on low risk investments, such as a term deposit,
this raises the question of the overall investment in this business.

EFFICIENCY AND EFFECTIVENESS

OF POLICIES AND PROCESSES
In addition to these financial measures of efficiency, Test the process yourself. Ask yourself, do those
you should also review the efficiency and effectiveness processes support your business strategy? If yes,
of your policies and processes. sign off on it, if not change the process.
To help you identify where improvements can be made, Examples of key policies to review or develop include
you’ll need to understand the strengths and weaknesses (but are not limited to):
of your current processes and document how things should
• mark-up policies
be done. Start by working with your staff to document the
processes behind each task, step by step. • discount policies

Ask someone in your business who has never completed • expenditure policies (such as travel policy, vehicle
the task to test the process. Is the process seamless? policy, personnel policies)
Are any steps missing? Are there any unnecessary steps? • authorisation policies (such as budget approval policy)
Is there a better way of doing it?
• internal control policies (such as staff sales policies)

BUNDALONG EFFICIENCY MEASURES

Stock Debtors’ Creditors’

Total stock Total Return Return Total sales
turnover average average
on hand to asset on assets on equity to sales
(Benchmark: days days
total assets turnover (ROA) (ROI) employees
3.5) outstanding outstanding
Description 2.30 39.58% 21 58 1.79 Nil Nil $109,676

Use 1.73 34.02% 58 182 0.98 Nil Nil $98,661

 BUSINESS EVALUATION GUIDE | 15

Bundalong’s stock turnover rate provides some It may however indicate there is room to grow retail
indication of stock issues, with the current year rate sales, which could improve cashflow as such customers
approximately 33 per cent below the plant nursery typically pay at the point of purchase.
benchmark. When considering a retail nursery, stock
Creditor’s days of 58 days indicate slow payment to
will be bought to sell according to season in addition
suppliers, as average terms are 30 days. This could
to a standard “year-round” stock. It’s not surprising
indicate issues with cashflow and highlights the need
with four seasons and some annual stock that the
for a cashflow forecast to be developed and maintained.
industry stock turnover rate is 3.5.
This view is supported by the total stock on hand as a
Debtor’s sales on average for the current year were percentage of current assets at 40 per cent for the current
58 per cent of total sales. This indicates a higher than year. This could lead to cashflow issues where short term
average reliance on trade sales (as opposed to retail debts need to be paid.
sales), with the benchmark for retail nurseries in
While no metric is recorded, the return on assets and
non-metro towns of 25 per cent. However, with average
equity are impacted by the continual losses.
debtors’ days outstanding of 21 days, this may not be
such an issue as collections appear in order.

PROFITABILITY
While some businesses can survive for some time The best metric for evaluating profitability is net margin.
without being profitable, to survive in the long run, a Evaluating profitability can also be undertaken by using
business must eventually attain and maintain profitability. other profitability ratios, return ratios and using the
mark-up and break-even calculations as set out below:

Net profit margin Net profit

x 100
Total sales
Description The net profit margin is calculated using the net profit after tax and interest (EBIT) and
includes any other non-trading income.
Use This measure should be used to compare the overall results of the business against other
time periods. In deciding which periods should be used in the comparison, the type of
business should be considered. For example, when analysing a seasonal business, such as
a snow skiing equipment store, it would be more useful to compare the winter season of the
current year with the winter season of the previous year rather than comparing the previous
month with the current month. Also, use this metric for an industry comparison. A larger net
margin, when compared to the industry average, indicates your business has a greater
margin of financial safety and is in a better financial position to commit capital to growth
and expansion.

Gross profit margin Gross profit

x 100
Total sales
Description Gross profit margin is the percentage of sales dollars remaining to pay general expenses
following the deduction of the cost of goods sold. Cost of goods sold can include direct
costs, such as materials / merchandise costs, carriage inwards on these, processing costs
and production overheads.
Use Analysis of this margin will assist in assessing the efficiency of the business, including the
efficiency of pricing, stock purchasing procedures and handling. Well-designed and executed
processes keep costs low and increase the gross margin.
 BUSINESS EVALUATION GUIDE | 16

Mark-up Gross profit

x 100
Cost of goods sold
Description Mark-up is the percentage difference between the actual cost and the selling price.

Use It is generally only a meaningful figure when referring to the sale of products rather than
services. It can be useful to use the mark-up calculation to ensure you set the selling price
at a level that covers all costs incurred with the sale.

Earnings before Net profit before interest and tax

interest and tax x 100
(EBIT) margin Total sales

Description This EBIT margin is the percentage of sales dollars left after deducting the cost
of goods sold and all expenses, except income taxes.
Use This measure enables the business to accurately compare the profit results with other
businesses in the same or similar industries. Interest and tax are excluded as tax and
interest can vary for each business. The analysis will provide information on the return
on sales of the business. This ratio is often quoted by analysts reviewing the
performance of a business compared to other businesses in the industry.

Break even analysis Fixed expenses

1 less (cost of goods sold)/(Total sales)
Description The break-even calculation shows how many sales have to be made in dollar terms
before all the expenses are covered and actual profit begins.
Use This measure provides information on the correlation between sales, volume and price.
It is particularly useful for setting sales targets for the business or employees. Once the
break-even figure is known, then the business can monitor sales to ensure that all expenses
for the period will be covered.

BUNDALONG PROFITABILITY MEASURES

Earnings before interest

Gross profit margin Mark-up Net profit margin
and tax (EBIT) margin
Description 43.37% 76.58% (29.39%) Same as EBIT – no tax
paid due to losses
Use 52.03% 108.46% (33.96%)

Gross margin for current year has decreased from the previous year and is 7.6 per cent below benchmark data. Given that
there has been a substantial increase in sales, it appears that this reduction will be mainly due to stock issues.
 BUSINESS EVALUATION GUIDE | 17

SUMMARY OF FINANCIAL PERFORMANCE REVIEW

There is no single metric that can identify the overall financial and operational health of a business. Liquidity tells you
about Bundalong’s ability to ride out short term rough patches; solvency tells Bundalong whether it can readily cover
long-term debt obligations; and efficiency and profitability gives an indication on Bundalong’s ability to convert inputs
into cash flow and income. All these factors together are necessary to get a complete and holistic view of the business’s
financial performance.
In the case of Bundalong, comparisons of metrics between current and previous year, as well as industry benchmark,
points towards cash flow, stock and cost management issues. To understand the reasons and identify “next steps”,
further investigation was required.
Had the metrics of Bundalong indicated that the business was stable and tracking well, a further investigation
into “what works” and “what can be done better” is still advisable to ensure continuous improvement and to
build/exploit its competitive advantage.

DEEPER INVESTIGATION
Stock turnover analysis
A deeper investigation into stock management at • Included in the cost of goods sold is the amount
Bundalong was found necessary because the 76.6 of stock “written off” during the year. This is recorded
per cent mark-up rate for the current year was: as “destroyed stock” and unaccounted losses realised
at stocktake. The current procedure for “destroying”
• below the industry benchmark
stock is that any staff member can identify stock which
• well down from the mark up rate of 108.5 per cent is dead or not in a sellable form at any time. The owner
in the previous year has advised that at one stage this procedure had to
• well below the business’s mark up policy rate of be approved by the owner, however this is not currently
110 per cent. being adhered to. To record destroyed stock, the item
is sold to the “destroyed stock” account and the plant
The deeper investigation of stock management found: and pot is disposed of. At the end of each month, the
• Although the mark-up on stock was adjusted twice closing stock balance is adjusted to reflect the destroyed
during the current year to reflect higher purchase stock. There is currently no review of destroyed stock,
price of goods, further analysis into the decrease either physical or in regular reports. There is a brief
in gross margin highlighted an increase in freight reference to destroyed stock in the general procedures
charges. Total freight and potting charges (add on and instructions on how to record destroyed stock.
costs) amount to $17,001, approximately 7 per cent Further analysis of destroyed stock found that 15 per cent
of total cost of goods sold during current year. of all destroyed stock was recorded on weekends, when
These charges had not been accounted for in the there is no management supervision.
final selling price and account for most of the • Following the current year stocktake, records show that
decrease in gross margin. The retail plant nursery a further $16,523 of stock was missing from the physical
association confirmed that increasing freight costs count, representing 6.6 per cent of the total cost of goods
were being experienced across the industry in the sold. The closing stock balance for the current year was
past 12 months. reduced by this amount to record this loss or shrinkage.
 BUSINESS EVALUATION GUIDE | 18

• Taking account of the destroyed stock and stock Therefore, destroyed and stock losses are well in
losses realised during the current year stocktake, excess of industry standards. If the destroyed or
the total shrinkage of stock at cost price amounted lost stock is added back to the profit and loss
to $28,813 or 11.65 per cent of total cost of goods statement, it leaves the following different:
sold and 27 per cent of the average stock holdings
for the current year. Consultation with the industry
association indicated that destroyed stock should
average approximately $4000 (at cost) per annum
based on the total sales of Bundalong.

Current figures Adjusted figures

Mark-up 76.59% 99.76%

Stock turn 2.30 1.79

• The average stock holdings for the current year • Bundalong was also found to have no formal buying
was $122,641 (including stock losses). The average procedure. Currently, stock purchases are decided
level of stock holdings required to meet benchmark through discussions with staff. Details of stock
stock turn, where cost of goods remain the same, movement, such as stock at low levels, high turnover
is $63,008. A physical analysis on aged stock was and plants that customers have requested, is provided
undertaken by the owner (currently the stock by staff. This, together with seasonal requirements,
management software system does not allow for forms the basis for purchase. The informal nature of
specific data on aged stock). Aged stock (held for the buying procedure could account for the high level
more than six months) was estimated at approximately of stock holdings, excess stock and hence destroyed
$31,783. In the event that the aged stock had been stock. A formal buying policy would include analysis
sold, the average stock levels would decrease to of current stock to ensure that stock turn and average
$90,857 (giving a stock turn rate of 2.41 turns), bringing stock holdings are in line with agreed benchmarks.
it somewhat closer to the industry benchmark.
• Given the level of information held in the current stock
• Low stock turnover rate can lead to higher probability management system, it is possible that this data can
of destroyed stock and /or aged stock. It also limits be used to assist in the buying procedures. Information
the ability of Bundalong to purchase new stock due to on high volume of sales of certain stock items, stock
space constraints. This in turn could result in lower sales held past a certain time frame and low levels of stock
due to lower than acceptable levels of “fresh” stock. items should form part of the formal buying procedures.

To improve stock turnover and gross margin, Bundalong should consider:

1. Reducing average stock levels.
2. Monitoring and managing ageing stock.
3. Implementing policy for destroying stock.
4. Regularly monitoring mark-up to ensure all costs are covered in selling price.
5. Develop and implement a formal buying procedure.
 BUSINESS EVALUATION GUIDE | 19

Sales Analysis
Total sales for current year increased by 27 per cent • The sales records also show that 86 per cent of
to $438,707 compared to previous year total sales overall sales (on average) are completed after
of $345,314. 11.00am each day.
Detailed analysis of sales records (point of sale) • The total amount of discount applied during the
provided the following information: current year was $41,158 (9.4 per cent of total income).
No comparison to the previous year was conducted
• Thirty-six per cent of all sales were achieved in three
as discount amounts were not separately recorded.
trading months; August, September and December.
The analysis also indicated that approximately 30 per • Two competitors were “mystery shopped” to ascertain
cent of sales were achieved in the slowest five months the discount policies they offer. It appears that the
of the current year. Bundalong discount policy is extremely generous.
With 58 per cent of sales made to account customers
• An analysis of the overall sales as a percentage
(landscapers and other larger organisations) and the
achieved for each day of the week highlighted that
same customers receiving the most beneficial discounts,
trading on Saturday and Sunday generated 36 per
the discounting policy is having a significant impact on
cent of total sales (public holidays have been included
total income.
in the trading figures for Sunday). The review noted
that for most weekends and public holidays, staffing • The profit and loss statement was adjusted to reflect
levels were two full- time equivalents (FTE) with no “add backs” of discounting and destroyed and
supervision from the owner. unaccounted for stock losses to show the difference:
• The official trading hours for the retail operation is
59.50 hours per week (8.30am to 5.00pm, including
weekends). When compared to the benchmark data,
this is a high number of trading hours, however, it is
within an acceptable range.

With stock adjustments

Current year
and discounts removed

$ % of sales $ % of sales

Sales 438,707 479,865

Cost of goods sold

Opening stock 119,979 119,9790
Purchases 224,938 224,938
344,917 344,917
Closing stock (96,490) (125,303)
Total cost of goods sold 248,426 56.6% 219,613 45.8%
Gross profit 190,280 43.4% 260,251 54.2%
Operating expenses
Salaries (233,294) 53.2% (233,294) 48.6%
Overheads (85,903) 19.6% (85,903) 17.9%%
Total operating expenses (319,198) 72.8% (319,198) 66.5%
Net profit/loss (128,917) (58,946)
 BUSINESS EVALUATION GUIDE | 20

Potential action points noted for Bundalong:

1. Record discounts separately in profit and loss statement against sales.
2. Amend discount policy.
3. Review pricing structure including mark-up policy.
4. Review staff roster for weekends to maximise sales potential.

OTHER FACTORS TO CONSIDER IN YOUR SALES ANALYSIS

As an extension to a sales analysis, consider:
1. How effectively are you meeting customer needs with the goods and/or services you offer?
2. How effectively are you matching your goods and services to your customers’ needs?
3. Which of your products and services are succeeding? Which aren’t performing as planned? Decide which products
and services offer both a high percentage of sales and high profit margins.
4. What’s really behind issues with a product or service, such as a high number of complaints? Consider areas such
as pricing, marketing, sales and after-sales service, design, packaging and systems during your review.
Look for “quick wins” that give you the breathing space to make more fundamental improvements.
5. Are you reviewing costs frequently? Are you keeping a close eye on your direct costs, your overheads and your
assets? Are there different ways of doing things or new technologies you could use that would lower your costs?
Consider ways in which you can negotiate better deals with your suppliers.

Cost management:
overhead expenses analysis
In comparison to the industry benchmark, Bundalong’s •S
 ales to hours paid showed the January to June
level of salary costs as a proportion of income is high. period was less productive than the July to December
Salary expense for the current year was $233,294 (53.2 period (which included the top three months for sales):
per cent of sales) compared to $200,236 (58.0 per cent)
•F
 ull current year per hour paid $39.10 sales
in the previous year and the industry benchmark of 20
to 25 per cent. • July to December per hour paid $46.33 sales

Due to this large difference between the salary costs of • J anuary to June per hour paid$31.90 sales
Bundalong and the industry benchmark, a deeper review • A review of the annual sales percentage per day and
of productivity and staff rostering was undertaken. This number of rostered staff clearly showed that the two
review provided the following observations: highest days in sales (weekends) have the lowest staff
• Bundalong have 5.3 full time equivalent (FTE) staff in attendance.
compared to the benchmark of a similar business •A
 dvertising expense is significantly higher than the
of 4.2 FTE. benchmark data for both current and previous year.
Given that the total income is in line with benchmark
data, this indicates that promotion is not effectively
translating to additional income.
 BUSINESS EVALUATION GUIDE | 21

• Vehicle operating costs for both current and previous • Two competitors were “mystery shopped” to ascertain
year are lower than benchmark. the discount policies they offer. It appears that the
Bundalong discount policy is extremely generous.
• The sales records also show that 86 per cent of overall
With 58 per cent of sales made to account customers
sales (on average) are completed after 11.00am each day.
(landscapers and other larger organisations) and the
• The total amount of discount applied during the same customers receiving the most beneficial discounts,
current year was $41,158 (9.4 per cent of total income). the discounting policy is having a significant impact
No comparison to the previous year was conducted on total income.
as discount amounts were not separately recorded.
• The profit and loss statement was adjusted to
reflect “add backs” of discounting and destroyedand
unaccounted for stock lossesto show the difference:

Potential action points:

1. Develop position descriptions for all staff positions.
2. Restructure staffing levels and responsibilities.
3. Review salary expenses and bring in line with benchmark data.
4. Implement staff accountabilities through key performance indicators for each staff member to monitor productivity.
5. Monitor and manage staff roster.
6. Review advertising, and consider advertising spend that can be monitored for success.

OTHER AREAS OF REVIEW

OTHER AREAS OF REVIEW:

Identify other areas for review based on your answer to these questions:
• What’s my direction?
• Looking at where you are now, where do you want to go over the next three to five years
and how you intend to get there?
• What are my markets - now and in the future?
• Consider which markets you should / want to compete in: how will they change and what does
the business need in order to be involved in these markets?
• How do I gain market advantage?
• Identify your competitors and look at what your business can do better than its competition in the chosen markets?
 BUSINESS EVALUATION GUIDE | 22

Sales of applied stock – growth potential Cash handling process – internal controls
The owners of Bundalong wanted to understand • Bundalong had a policy that one person is to
how applied stock e.g. fertiliser (i.e. not their plants) cover the cash register activity each day. However,
contributed to overall profitability. Understanding based on a review of the customer transaction
this will inform their decision of selling more applied reports, it appears this policy was often breached,
stock and seeking alternative revenue streams. This especially on weekends when only two staff members
is particularly important as applied stock can often are working. Bundalong will need to review the
carry higher gross margin. practicality of this policy when a large proportion
of its sales are generated on the weekend.
From their accounts it was identified that applied
stock sold in the current year was $18,043 (4.1 per • End-of-day cash register sales tallies are prepared
cent of sales), well below the industry standard of by the person responsible for the daily register duties.
30 to 35 per cent. This implies that there is a bigger However, there is no policy in place for a second
opportunity for Bundalong to sell their applied review. Although in practice if the tally sheet does
stock. It therefore needs to review its strategy for not balance a second person will review it, the overall
selling these complementary products. practice creates a high risk as the person responsible
for the collection of cash from sales is also responsible
for end of day cash reconciliation. There is therefore
a possibility that a sale may not be entered through
the register, or voided, or entered as returned and
the cash not entered in the register. Should there be
any such event, it would be difficult to detect it under
the current procedures.
•A
 review of the customer transaction report also
indicated that on many occasions staff were processing
sales to themselves (staff sales). This should not occur,
especially without supervision. Bundalong will need to
institute controls that always require staff sales to be
processed by the owner or a senior manager on duty.

Potential action points:

1. Train staff to “up-sell” applied stock to increase margins.
2. Amend and document cash register responsibilities.
3. Review all internal control processes, with particular emphasis on controls over stock to avoid shrinkage.
4. Train staff on the importance of adhering to internal control processes.
 BUSINESS EVALUATION GUIDE | 23

CONCLUSION

When evaluating business performance, look at: A good business performance evaluation looks beyond
the numbers to non-financial drivers such as customer
• Core activities: What do you do, the products
base / market segmentations to understand what makes
you make or services you provide? What makes them
your offerings successful, how they could be improved
successful, how could they be improved, and could
and if there’s an opportunity for selling complementary
you launch new complementary products or services?
products or services.
• Cash flow and liquidity: Set up a cash flow forecast
If the business evaluation highlights areas of concern,
and regularly review and update the forecast. This is
investigate in greater depth. If the review highlights
the balance of all the money flowing in and out of
areas where your business outperforms other areas,
your business.
also investigate that as you may pick up lessons for
• Working capital: Compare with past performance other areas of your business.
and against other businesses in your industry
Once you have evaluated the business performance
Consider whether your requirements have changed
(including reviewing against benchmark data from
and why there are movements? Do you need to source
your industry), revisit and update your business plan.
additional capital?
Make sure you include the developments you’ve noted
• Cost base: Constantly review your cost base in your evaluation.
and ensure the costs are covered in your sale
price, but don’t expect customers to pay for
business inefficiencies.
• Borrowing and growth: What line of credit or loans
do you have? Are there more appropriate or cheaper
forms of finance you could switch to instead? Do
you have plans in place to adapt your financing
to accommodate your business’ changing needs
and growth?
• Operating efficiency and productivity:
As a business owner you should aim to achieve the
best possible use of all business resources. Efficiency
is about maximising the outputs of the business using
the minimal level of inputs. Regular monitoring will
ensure that the business is operating efficiently, that
all assets are being utilised to generate the best return
on investment, and staff are productive.
 BUSINESS EVALUATION GUIDE | 24

APPENDIX A: BUNDALONG’S FINANCIAL

& OPERATIONAL DATA
FINANCIAL STATEMENTS OF BUNDALONG RETAIL NURSERY PLANT

Profit and loss statement* for year ended July

Current year Previous year

$ % of sales $ % of sales
Sales 438,707.15 345,314.93
Cost of goods sold
Opening stock 119,979.00 71,573.65
Purchases 224,938.00 214,050.11
344,917.00 285,623.76
Closing stock (96,490.49) (119,979.00)
Total cost of goods sold 248,426.51 56.63% 165,644.76 47.97%
Gross profit 190,280.64 43.37% 179,670.17 52.03%
Operating expenses
Salaries (233,294.80) 53.18% (200,236.01) 57.99%
Overheads (85,903.42) 19.58% (96,691.18) 28.00%
Total operating expenses (319,198.22) 72.76% (296,927.19) 85.99%
Net profit/loss (128,917.58) (117,257.02)
Average stock
$ 108,234.75 $ 95,776.33
held for each year

*
Profit & Loss Statement / Income Statements measure the profitability of your business during a certain time period by showing your business’s profits and losses.
 BUSINESS EVALUATION GUIDE | 25

Breakdown of operating expenses

Operating expenses Current year Previous year

$ % of sales $ % of sales
Cleaning contract 1,740.00 2.03 1,160.00 1.20
Repairs and maintenance
Buildings 794.26 0.92 656.39 0.68
Equipment 978.22 1.14 859.64 0.89
Furniture and fittings 1,702.80 1.98 1,626.81 1.68
Grounds 4,656.30 5.42 9,646.20 9.98
Electricity 2,821.48 3.28 2,729.10 2.82
Vehicles
Fuel 3,220.07 3.75 2,578.55 2.67
Registration 355.00 0.41 352.20 0.36
Insurance 1,250.00 1.46 1,200.00 1.24
Repairs and maintenance 1,712.51 1.99 1,872.71 1.94
Transport – contract — — 460.04 0.48
Depreciation
Equipment 5,152.84 6.00 5,421.84 5.61
Furniture and fittings 4,324.41 5.03 4,961.39 5.13
Motor vehicles 6,392.29 7.44 6,577.53 6.80
Advertising 14,515.12 16.90 15,954.60 16.50
Uniform costs 277.89 0.32 451.54 0.47
Printing and stationery 1,017.50 1.18 892.62 0.92
Telephone 2,655.50 3.09 2,960.61 3.06
Staff provisions 1,431.55 1.67 1,665.49 1.72
Rent 22,455.00 26.14 19,525.00 20.19
Equipment 620.00 0.72 1,222.22 1.26
Staff training 310.09 0.36 438.18 0.45
Traveling 191.07 0.22 76.63 0.08
Materials and supplies 529.48 0.62 581.65 0.60
Bank charges 3,013.19 3.51 2,809.30 2.91
Memberships and subscriptions 579.32 0.67 520.00 0.54
Health and safety 259.30 0.30 117.79 0.12
Postage 364.70 0.42 369.44 0.38
Computers — — 4,504.14 4.66
Sundry administration costs 2,583.53 3.01 1,681.39 1.74
Consultancy fees — — 2,818.18 2.91
Total operating expenses 85,903.42 96,691.18

Areas noted for further review from figures above include decrease in ground maintenance expense, increases in rent,
bank charges and why there is no computer expense for the current year (i.e. is technology not up to date?).
 BUSINESS EVALUATION GUIDE | 26

Balance sheet*

Current year Previous year

$ $
ASSETS
Current assets
Cash/bank 16,320.00 65,777.82
Debtors 14,280.00 32,000.00
Stock 96,490.00 119,979.00
Other 4,210.00 5,500.00
Total current assets 131,300.00 223,256.82
Non-current assets
Delivery vehicle 75,000.00 75,000.00
Less accumulated depreciation (19,547.35) (12,969.82)
Total 55,452.65 62,030.18
Nursery fit out 115,000.00 115,000.00
Less accumulated depreciation (66,955.45) (61,994.06)
48,044.55 53,005.94
Equipment 50,000.00 50,000.00
Less accumulated depreciation (41,021.20) (35,599.36)
8,978.80 14,400.64
Total non-current assets 112,476.00 129,436.76
Total assets 243,776.00 352,693.58
LIABILITIES
Current liabilities
Creditors 65,000.00 48,000.00
Credit card 15,000.00 12,000.00
Total current liabilities 80,000.00 60,000.00
Non-current liabilities
Bank loan 20,000.00 20,000.00
Total liabilities 100,000.00 80,000.00
EQUITY
Shareholders’ funds
272,693.58 389,950.60
(including retained earnings, losses)
Less current year accumulated losses (128,917.58) (117,257.02)
Total equity 143,776.00 272,693.58

*
Balance Sheet shows your business’s financial health, measuring how much you owe and own.

Areas noted for further review from figures above include increases in current liabilities, no finance facility in place
(contingency plan), substantial decrease in cash at bank.
 BUSINESS EVALUATION GUIDE | 27

OPERATIONAL INFORMATION OF BUNDALONG RETAIL NURSERY PLANT

Operational activities

Staffing

FULL-TIME EQUIVALENT 5.30, INCLUDING:

Owner / manager 1.30

Apprentice 1.00
6 Part-time 3.00
PART-TIME DUTIES INCLUDE:
General sales, orders, quotes 0.80
General sales, admin 0.60
General sales, buying 0.60
General sales 0.60
2 staff general sales (2 x 0.20) 0.40
Trading hours: 59.50 hours per week, 8.30am to 5.00pm every day except major public holidays.

Documentation reviewed

Mark-up policy: The standard mark-up policy is 110 per cent.

Buying policy: No formal buying policy held.
Job descriptions: No formal job descriptions held.
Discount/VIP policy: The discount policy notes the following:

Discount Category
2.5% • Non-VIP members

10% • VIP members

• Schools
• Businesses
• Garden design customers
15% • Landscapers value to $200
20% • Landscapers value $201 to $500
• TAFE and other colleges
25% • Landscapers value more than $500
• Nursery staff
 BUSINESS EVALUATION GUIDE | 28

INDUSTRY BENCHMARK

As provided by Bundalong retail plant nursery from their industry association.

Financial benchmarks

Total average income $ 446,556

Cost of goods sold 48.99%

Gross margin 51.01%
SELECTED OVERHEADS AS PERCENTAGE OF INCOME
Advertising and promotion 2.26%
Salaries and wages including staff on costs 13.77%
Vehicle operating costs 3.74%
Rent 3.32%
Bank charges 1.53%
Total overheads 37.25%
Net profit margin 13.76%
PERSONNEL NUMBERS (FTE)
Working owners 1.52
Sales staff and nursery people 2.36
Any other staff 0.49
Total personnel 4.37
OTHER BENCHMARK INFORMATION
Stock turn rate 3.50
Plants grown in house as percentage of total sales 20.00%
Trading hours per week 54
Percentage of sales made to account customers 25.00%
 BUSINESS EVALUATION GUIDE | 29

Analysis of Bundalong retail nursery financial information in

comparison to the benchmark in current and previous year

Variance Variance of Variance of

Bundalong
Industry Bundalong of current current to previous
previous
benchmark current year year to previous year to
year
benchmark year benchmark
$446,556.00 $438,707.15 ($7,848.85) $345,314.93 $93,392.22 ($101,241.07)
Cost of goods sold 48.99% 56.63% 7.64% 47.97% 8.66% (1.02%)
Gross margin 51.01% 43.37% (7.64%) 52.03% (8.66%) 1.02%
SELECTED OVERHEADS AS A PERCENTAGE OF INCOME
Advertising and promotion 2.26% 16.90% 14.64% 16.50% 0.40% 14.00%
Salaries including 13.77% 53.18% 39.41% 57.99% (4.81%) 44.22%
staff on costs
Vehicle operating costs 3.74% 7.61% 3.87% 6.21% 1.40% 2.47%
Rent 3.32% 26.14% 22.82% 20.19% 5.95% 16.87%
Bank charges 1.53% 3.51% 1.98% 2.91% 0.60% 1.38%
Total overheads 37.25% 72.76% 35.75% 85.99% (13.00%) 48.75%
Net profit margin 13.76% (29.39%) (43.15%) (33.96%) 4.57% (47.72%)
PERSONNEL NUMBERS (FTE)
Working owners 1.52 1.30 (0.22) 1.30 0 (0.22)
Sales staff and
2.36 4.00 1.64 3.50 0.50 1.14
nursery people
Any other staff 0.49 0 (0.49) 0 0 (0.49)
Total personnel 4.37 5.30 0.93 4.80 0.50 0.43
OTHER BENCHMARK INFORMATION
Stock turn rate 3.50 2.30 (1.20) 1.73 0.57 (1.77)
Plants grown in house as a
20.00% 22.00% 2.00% 20.00% 2.00% 0
percentage of total sales
Trading hours per week 54 59.50 5.50 59.50 0 5.50
Percentage of sales made
25.00% 58.00% 33.00% 55.00% 3.00% 30.00%
to account customers
 BUSINESS EVALUATION GUIDE | 30

Commentary on industry benchmark variances

Total income The total income in the current year is up from the previous year and is within
5 per cent of industry benchmark.
Cost of goods sold Total cost of goods sold for the current year is 8.66 per cent higher than the previous
year and 7.64 per cent higher than the benchmark. Recommend further investigation.
Gross margin Gross margin variances in line with cost of goods sold variances noted above.
Review cost of goods sold.
Selected overheads as percentage of income
Advertising and promotion Current year expense up slightly from previous year. This expense for current year and
previous year are substantially higher than benchmark. Recommend further investigation.
Salaries including Current year expense lower than previous year, although increase in staff numbers
staff on costs (see FTE data below). However, figures are still substantially higher than benchmark.
Recommend further investigation.
Vehicle operating costs This expense for both current and previous year is higher than the benchmark.
Recommend further investigation.
Total overheads Current year expenses lower than previous year, however substantially higher than
benchmark most likely due to high salary overheads. Recommend further investigation.
Net profit margin Net operating loss reported for both current and previous year due to
key areas noted above.
Personnel numbers (FTE)
Working owners The owner is working slightly below benchmark.
Sales and nursery staff
The current year staffing is higher than previous year (although overall salaries are lower)
Any other staff
and higher than benchmark data. Recommend further investigation.
Total personnel
Other benchmark information
Stock turn rate The current year stock turn rate is higher than the previous year, however, both figures
are well below benchmark. Further investigation recommended.
Plants grown in house as The current year plants grown in house is higher than benchmark.
percentage of total sales Further investigation recommended.
Trading hours per week Total trading hours remained constant for both current and previous year, and slightly
higher than the benchmark.
Percentage of sales made The percentage of sales made on account increased slightly in current year compared to
to account customers previous year, however for both years this percentage is substantially higher than industry
benchmarks. Given these sales are on discount, it means that most sales are below the
mark-up stated in the mark-up policy. Further investigation recommended.
 BUSINESS EVALUATION GUIDE | 31

APPENDIX B: CHECKLIST OF SUGGESTED

INFORMATION SOURCES FOR BUSINESS EVALUATION

STRATEGIC • One and five-year strategic plans

• Succession plan
FINANCIAL INFORMATION • Financial statements – profit and loss, balance sheet
• Current year budget
• Current year forecast – profit and loss and cashflow
• Point of sale information – sales by employees, goods returns,
no sale items and other relevant information
• Stock management records
• Work-in-progress records and reports
COMPLIANCE REPORTING • Taxation returns, including goods and services tax statements if required
• Loan, lease and other financing agreements
• Accreditation reports
• Financial statements
• Industry-specific reports
POLICIES AND PROCEDURES •A
 ll human resources policies, including job descriptions,
organisation charts and staff rosters
• All financial policies, including pricing, discounting and buying
• Internal control procedures, such as segregation of duties
• Disaster and emergency planning policies, including data back-up
PHYSICAL ASSESSMENT •R
 eview controls in place, such as security cameras, security of stock,
security of passwords and other access methods
 BUSINESS EVALUATION GUIDE | 32

APPENDIX C: EXAMPLE OF A TEMPLATE

FOR BUSINESS EVALUATION

Analysis of industry benchmark to current and previous year

Variance Variance of
My business’ Variance of
Industry My business’ of current previous
previous current to
benchmark current year year to year to
year previous year
benchmark benchmark
Total income
Cost of goods sold
Gross margin
SELECTED OVERHEADS AS A PERCENTAGE OF INCOME
Advertising and promotion
Salaries including
staff on costs
Vehicle operating costs
Rent
Bank charges
Insert other key overheads
for the business

Net profit margin

PERSONNEL NUMBERS (FTE)
Working owners
Sales staff
Any other staff
Total personnel
OTHER BENCHMARK INFORMATION
Stock turn rate
Trading hours per week
Insert other key benchmark
information for the business

Percentage of sales made

to account customers
 BUSINESS EVALUATION GUIDE | 33

Profitability measures

Formula Current Year Previous Year Benchmark Comment

Gross Gross profit

x 100
profit margin Net sales

Gross profit
Mark-up x 100
Cost of goods sold

Earnings before Net profit before

interest and tax interest and tax
x 100
(EBIT) margin Net sales

Net profit
Net profit margin x 100
Total Income

Fixed expenses
Break x 100
even analysis 1 less (cost of goods
sold)/(net sales)

Cash flow, liquidity and solvency measures

Formula Current Year Previous Year Benchmark Comment

Total current assets less

Working capital total current liabilities
to total sales
Total sales
Total current assets
Current ratio
Total current liabilities
Total current assets
Net sales
Quick (acid) ratio less stock on hand
Total current liabilities
less bank overdraft
Leverage Total liabilities
(gearing) ratio Total equity
Debt to Total liabilities
asset ratio Total assets
 BUSINESS EVALUATION GUIDE | 34

Opening bank balances plus all receipts for the period Comments
less all payments for the period. The period can be
as short as weekly, however, more commonly
Cashflow forecast a cashflow forecast period is for a month.
For businesses experiencing cash flow difficulty,
it is recommended that forecasting is done more
regularly than what is usual for the business.

Review all loan documentation and finance facilities Comments

(such as overdrafts), including leases, hire purchase and
Evaluation of debtor finance and ensure that each finance facility
funding sources is readily available when required. Areas of review
should include loan terms and conditions and financial
covenants and reporting compliance requirements.

Efficiency measures

Formula Current Year Previous Year Benchmark Comment

Cost of goods sold

Stock turnover Average stock held
for the period
Total stock
Total stock on hand
on hand to
Total assets
total assets
Total number of days
in debtors X the
Debtor’s days analysis period
Total credit sales for
the analysis period
Total number of days
in creditors X the
Creditor’s days analysis period
Total cost of goods
sold for the period
Total Net sales
asset turnover Total assets
Return on Net profit before tax
assets (ROA) Total assets
Return on equity/ Net profit before tax
investment (ROI) Total equity
Total sales to Total sales
number of Number of
sales employees sales employees
 BUSINESS EVALUATION GUIDE | 35

Employee sales -
Total value of sales made
Current year Previous year Variance Comments
by each employee for
the analysis period
Employee 1
Employee 2
Employee 3

Aged debtors report* Current year Previous year Variance Comments

Current
31 to 60 days
61 to 90 days
91 to 120 days
121 days >

Attach financial system report to provide detail on each customer. The terms in report should match terms provided to customers
*

Aged creditors report* Current year Previous year Variance Comments

Current
31 to 60 days
61 to 90 days
91 to 120 days
121 days >

Attach financial system report to provide detail on each customer. The terms in report should match terms provided by suppliers
*
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