department of finance and services – comprehensive financial assessment report department of...

Department of Finance and Services – Comprehensive Financial Assessment Report

Department of Finance and Services“Comprehensive” Financial Capacity Assessment Template

[Contracting party]January 2013

ABN [xxx xxx xxx]

Department of Finance and Services – Comprehensive Financial Assessment Report 2

Criteria Conclusion Supporting 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

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).


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.

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/Tender Details

Contract name

Contract description / nature

Contract size

Proposed start date

Duration (months)

Contract value as % of LTM Revenue

Within contractors size capability (Y/N)

NTA Working CapitalCurrent

Ratio

Criteria:>5% contract

value>10% of contract

value>1

Critical Value (based on $[ ]m contract > $[ ] > $[ ] > 1

[Contractor] Pty Ltd $[ ] $[ ] [ ]

Criteria met? (Yes/No) (Yes/No) (Yes/No)

Contract Summary

DFS Assessment 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).

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.


Executive Summary

Understanding the contractor’s ownership and structureAnalysis

Area Questions / Issues to be Considered Rating Comments & 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]


Executive Summary

Understanding the contractor’s ownership and structureAnalysis


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.



Executive Summary

Understanding the contractor’s businessAnalysis


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.



Executive Summary

Understanding the contractor’s businessAnalysis


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.



Executive Summary

Understanding the contractor’s financial capacity

Analysis Area Questions / Issues to be Considered Rating Comments & 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.



Executive Summary



Forward pipeline / order position

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; a significant pipeline value attributed to jobs with no apparent back up or basis.

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.

More detailed gearing analysis

If additional funding were required, does the business have “borrowing capacity” or access to new equity?

Include a high level summary of any issues identified which may restrict the contractor’s ability to borrow additional funds.

Indicators of higher risk could include (but are not limited to):

Gearing (level of borrowings) excessive above acceptable levels, poor credit history with the existing lender.

Summarise any potential mitigating circumstances e.g. do any shareholders have the capacity and willingness to inject further equity for liquidity if required? Have offers to refinance been received from alternative lenders?



Executive Summary



Forecast Profitability

What is the forecast trajectory of the business performance? Is revenue growth being translated to improved profit? What is the forecast trajectory of operating expenses?

Summarise headline numbers forecast (e.g. Revenue, Gross profit, Net Profit) and key trends or issues identified.

Example wording:• Revenue of $[X] is forecast in FY13, an increase of [X]% on FY12.

• Gross profit of $[X] is forecast in FY13 at a margin of [X]%, a [X] percentage point improvement on FY12.

Include high level commentary on key forecast assumptions e.g. the proportion of forecast revenue attributable between contracted revenue, identified opportunities (not secured) and new wins (“Blue Sky”), and margins assumed on work completed.Indicators of higher risk could include (but are not limited to):Limited secured work / Excessive “Blue Sky” in the forecast period (may lead to a ‘drop off’ in work if sufficient new jobs are not secured), a significant improvement in margins assumed in contrast to those achieved historically, aggressive reduction in operating costs assumed with limited or no plans in place on how to be achieved.

Forecast Liquidity

Is revenue growth being translated to improved cash flow? Are the forecast financing requirements of the business beyond the capacity of existing finance facilities or equity capability of shareholders?

Summarise headline numbers forecast (e.g. Closing cash, Net cash flow, overdraft headroom over the forecast period) and key trends or issues.

Example wording:• ABC is forecast to remain within existing facilities in the forecast period with minimum headroom

of $Xm forecast in May.

• Working capital is forecast to remain steady vs. the historical period with debtor and creditor days within an acceptable range of contract terms.

Include high level commentary on key forecast assumptions e.g. equity injections or loan draw downs assumed.Indicators of higher risk could include (but are not limited to):Forecast funding short falls with no or questionable finance sources assumed to fill the gaps (e.g. drawdown of loans assumed over and above facilities currently available with no evidence of ability to increase facilities , or equity injections with no evidence that shareholders are able or willing to provide funds), significant favourable variances in forecast assumptions to those observed historically (e.g. NWC assumed reduced to release cash ).



Executive Summary



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.

Summarise the profit and cash flow impact of illustrative sensitivities applied to the forecast. E.g.

– A 15% reduction in turnover

– 7 day change in debtor / creditor days

– a 20% reduction in project margins (GM 20% reduced to 16%)

– a 10% increase in overhead costs



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 %

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%

X% X% X%

[ ] family trusts and other holding structures

X% 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% XX%

Float (if applicable)

[Cross Guarantee

$Xm]

XX%



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


Management Structure (if relevant)

[Sales Manager]

[Executive Director]

[HR Manager][Marketing Manager]

[Management Accountant]

[Financial Accountant]

[Finance Manager]



Directors Profiles Manager 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?).


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.


Financial Capacity

15

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.]

Key Ratios FY10 FY11 FY12FY13

(forecast)

Profitability Ratios

Revenue Grow th - - -

Gross Margin % - - - -

Overheads % of Revenue - - - -

EBIT Margin % - - - -

EBITDA Margin % - - - -

Net Profit Margin % - - - -

Other P&L Ratios

Effective Tax Rate % - - - -

Effective Interest Rate % - - - -

Dividend as a % of NPAT - - - -

Profit & Loss$000's

FY10 FY11 FY12FY13

(forecast)% Change FY12-FY13

Revenue

Cost of Sales

Gross Margin - - - -

Overheads

Wages

Rent / Electricity

Insurance

Administration

Other

Total Overheads - - - -

EBITDA - - - -

Depreciation & Amortisation

EBIT - - - -

Net Interest

NPBT - - - -

Tax

NPAT - - - -


The contractors business

16

Normalisation of earnings

One off and non-recurring items (Normalisations)

This section aims to identify any non-recurring or one-off income or expenses that occurred in the historical period which are not representative of normal operations. This provides a more appropriate measure of historical earnings to compare forecast earnings against.

Factors to consider:• Were any expenses incurred due to natural disasters or other events that could not

have reasonably been predicted or mitigated?

• Were any items of income earned which are not representative of ‘normal‘ operations going forwards?


Normalisation $m

FY10 FY11 FY12

Reported EBITDA - - -

Normalisation adjustments

Adjustment 1 - - -

Adjustment 2 - - -

Adjustment 3 - - -

Adjustment 4 - - -

Adjustment 5 - - -

Total Adjustments - - -

Normalised EBITDA - - -



17

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?

Work on Hand (Revenue)($m)

Total Project Value

Amount Completed

% CompletedAmount

Remaining% Remaining

Project 1 - - -

Project 2 - - -

Project 3 - - -

Project 4 - - -

Project 5 - - -

Project 6 - - -

Project 7 - - -

Project 8 - - -

Project 9 - - -

Project 10 - - -

Total Work on Hand - - - - -

Pipeline Summary # of bids /

opportunitiesGross

Value $mHistorical Win rate

Net value $m

Bids Submitted [ ] [ ] [ ] [ ]

Identified opportunities [ ] [ ] [ ] [ ]

Estimated pipeline value $[ ]m $[ ]m

Estimated pipeline (FYXX) $Xm

Secured revenue (FYXX) $Zm

Forecast revenue (FYXX) $Ym

Gap (“Blue Sky” forecast) $Y-Z-Xm




18

Contractor and supplier concentration

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 any financial difficulty.

• If a pipeline is available, comment the extent to which concentration is expected to increase or decrease going forwards.

Project margins

This section aims to identify any significant instances of cost overruns / mismanagement of projects, evidenced by significant variations in margins or the existence of loss making projects.

Consider the consistency of margins achieved on completed projects and Management explanations for variances.

Supplier concentration

This section aims to identify any apparent over reliance on a limited number of Suppliers and any mitigating factors.

Factors to consider:• Are supplies sourced from many or few suppliers? If concentrated, are supplies

generic or specialist in nature?

• If specialist supplies, are they used in a manner which is critical to their contracts?

• If only available from few suppliers, are any contingency plans in place to mitigate breaks in supply?

• For suppliers identified as key to the contractor: Is there any indication of financial difficulty or distress?

• NB If generic supplies; alternative supply likely to be readily available, even if currently only sourced from one or few suppliers (therefore low risk).


Suppliers / Subcontractors by spend$ m

Purchases % of totalTerms (days)

Supplier 1 - 0%

Supplier 2 - 0%

Supplier 3 - 0%

Supplier 4 - 0%

Supplier 5 - 0%

Supplier 6 - 0%

Supplier 7 - 0%

Supplier 8 - 0%

Supplier 9 - 0%

Supplier 10 - 0%

Others - 0%

Total - 0%

Major Customers/Projects$ m

StatusRevenue(FYXX)

% of total

Margin GM%

Project 1 [Complete / ongoing] - 0% - 0%










Others - 0% - 0%

Total - 0% - 0%


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


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.

Balance Sheet$ 000's

FY10 FY11 FY12FY13

(forecast)

ASSETS

Cash & cash equivalents

Receivables

Inventory/ WIP

Other current assets

Total current assets - - - -

Property, Plant & Equipment

Intangibles

Other non-current assets

Total assets - - - -

LIABILITIES

Creditors & accruals

Short term debt

Other current liabilities

Total current liabilities - - - -

Long term debt

Other non-current liabilities

Total liabilities - - - -

Net assets (Equity) - - - -

Key Ratios FY10 FY11 FY12FY13

(forecast)

Working Capital ratios

Current Ratio - - - -

Days Debtors - - - -

Days Creditors - - - -

Days Inventory - - - -

NWC ($ 000's) - - - -

NWC/Sales - - - -

Financing ratios

Net Debt to Equity - - - -

Net Debt to Total Assets - - - -

Total Debt to Equity - - - -

Debt Service ratios

EBITDA Interest Coverage - - - -

Total Debt to EBITDA - - - -



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.


Cash Flow Statement$ 000's

FY10 FY11 FY12FY13

(forecast)

% Change FY12-FY13

NPAT - - - - -

Non-cash items - - - - -

Working capital movement - - - -

Cash flow from operating activities - - - - -

Cash f low from investing activities - - - - -

Cash f low from financing activities - - - - -

Distributable cash flow - - - - -

Dividends paid -

Net cash flow - - - - -



Working Capital Management

Financial Capacity

Debtors Ageing

• This section aims to identify any potential debtor recoverability issues .

• Table to illustrate the breakdown of debtors between customers, the ageing of the accounts due and therefore whether there are any customer specific ageing issues.

Factors to consider:• Comparison of the ageing of debtors to contractual terms (credit offered to

customers).

- Accounts aged beyond the credit period offered could indicate a recoverability issue.

• Significance of the size of aged balances to the business.

Example wording:• With the exception of $[ ]k receivable from Debtor 5, all debtors are less than 60 days old and

are therefore within an acceptable range of 45 day credit terms.

Creditors Ageing

• This section aims to identify any potential stretch in creditors.

• Table to illustrate the breakdown of creditors between customers, the ageing of the accounts payable and therefore whether there are any supplier specific ageing issues.

Factors to consider:• Balances aged beyond normal trading terms across a number of creditors may

indicate liquidity pressure or unsustainable credit stretch.

• Aged balances specific to one or two suppliers could be more indicative of disputed amounts as opposed to cash flow problems but should be investigated.

Example wording:• Ageing is within an acceptable range of average terms of 30 to 45 days with the majority of

balances aged less than 60 days.

Debtor ($) Current 1-30 31-60 61-90 Over 90 Total

Debtor 1

Debtor 2

Debtor 3

Debtor 4

Debtor 5

Debtor 6

Debtor 7

Debtor 8

Debtor 9

Debtor 10

Totals - - - - - -

Creditor ($) Current 1-30 31-60 61-90 Over 90 Total

Creditor 1

Creditor 2

Creditor 3

Creditor 4

Creditor 5

Other

Totals - - - - - -

41.87 42.48 43.50

30.39 31.54 34.18

0

10

20

30

40

50

FY10 FY11 FY12

Day

s

Debtor-Creditor Days

Days Debtors Days Creditors


Forecast

Forecast review

Profit and loss forecast

Commentary should be around profitability and trajectory aimed at identifying;- Trend of revenue forecast (growing or contracting) - how does this compare to the

historical period?- How movements are forecast to translate to profitability through:

- Margin trends (improved or deteriorated)- Movements in the level of overheads (on an absolute basis and as a proportion of

revenue)

Financial Capacity

Source: 1) Management forecast

Cash flow forecast

Commentary should be around cash generation and trajectory aimed at identifying;- Is the business forecast to generate cash from operating activities ?

- What’s the trend (increasing or decreasing) - how does this compare to the historical period?

- Are there significant monthly variances in cash generation?- Are any significant additional borrowings, repayments or equity injections forecast?

Factors to consider:• Is operating cash flow forecast to be earnings driven (sustainable) or generated

through release of working capital (non-sustainable)? How does this compare to the historical period?

• Is there a funding need or limited headroom forecast based on existing facilities? Are there any mitigating factors already built into the forecast (e.g. increase borrowings, equity injection). How certain is the timing and amount of any such mitigating actions?

Jul-12 Aug-12 Sep-12 Oct-12 Nov-12 Dec-12 Jan-13 Feb-13 Mar-13 Apr-13 May-13 Jun-13

PROFIT & LOSS:

RevenueCost of Sales

Gross MarginEBITDANPAT

CASH FLOW STATEMENT:

NPAT

Non-cash items

Working capital movement

Cash flow from operating activities

Cash f low from investing activities

Cash f low from financing activities

Distributable cash flow

Dividends paid

Net cash flow

Closing cash balance

FY13Total

F'cast FY13$000's


Financial Capacity

23

Forecast assumptions


Assumptions Details Reasonable (Y/N)

Existing work completion

Summarise completion assumptions and forecast margins of existing work in hand.Consider the performance in the YTD and if any other indicators to suggest delays or overruns should be forecast.

Consider management’s justification of material changes in contract performance to that achieved in the YTD (or lack of) and conclude on the reasonableness of those assumptions. E.g. have recent supply shortages and likely subsequent delays to project completions been considered? Note whether sensitivities would be appropriate.

New work start up

Provide details of new work forecast including a split of value between secured work, that attributable to identified opportunities, and any “blue sky’” . Summarise any associated assumptions (e.g. assumed success rate on identified opportunities, assumed start for secured work).

Consider management’s justification of material changes assumed from historical win rates and on the proportion of forecast revenue comprising “Blue Sky”. Conclude on the reasonableness of those assumptions.Note whether sensitivities would be appropriate.

Forecast contract margins & fixed overheads

Provide a high level summary of key margin assumptions and fixed overhead assumptions for the forecast period. Discuss any significant changes in comparison to the historical period and any variants in the forecast period that may result in their change.Also consider where no change observed but perhaps there should be e.g.

Consider management’s justification of material changes in margins from historical norms (or lack of) and conclude on the reasonableness of those assumptions E.g. has a recent deterioration in economic conditions or increase in input costs been considered? Is a step up in operating costs required to support forecast revenue growth that has not been considered?Note whether sensitivities would be appropriate.

Working capital (debtor, creditor, and WIP / inventory days)

Provide a high level summary of key working capital assumptions (i.e. days) in the forecast period. Compare these to trade terms and those observed in the historical period.

Consider management’s justification of any material changes from historical norms (or lack of) and conclude on the reasonableness of those assumptions.Note whether sensitivities would be appropriate.

Capital expenditureState the amount and nature of CAPEX included in the forecast period and make comparison to historical levels.

Consider management’s justification of the level of CAPEX forecast in relation to historical levels (i.e. why greater or less) or with reference to expansion plans and conclude on the reasonableness of those assumptions.Note whether sensitivities would be appropriate.

Debt servicingSummarise any changes in financing assumptions for example debt payback, drawdowns or equity injections, and compare to existing facilities.

Consider management’s justification of any material changes assumed from existing facilities and conclude on the reasonableness of those assumptions with reference to evidence of alternative facilities or equity funding available presented by management.Note whether sensitivities would be appropriate.

[Other (as appropriate)] Add detail as appropriate.Consider management’s justification of any material changes from historical norms and conclude on the reasonableness of those assumptions.Note whether sensitivities would be appropriate.


Financial Capacity

24


Sensitivities

Commentary

The sensitivities and their impact will vary on a case by case basis. Examples of sensitivities that could be included are:

• A 15% reduction in turnover

• 7 day change in debtor / creditor days

• a 20% reduction in project margins (GM 20% reduced to 16%)

• a 10% increase in overhead costs

Jul-12 Aug-12 Sep-12 Oct-12 Nov-12 Dec-12 Jan-13 Feb-13 Mar-13 Apr-13 May-13 Jun-13

Basecase Closing Cash

Sensitivity 1

Sensitivity 2

Sensitivity 3

Sensitivity 4

Cumulative Sensitivity Impact

Sensitised Closing Cash

$000'sF'cast FY13

FY13

-20

0

20

40

60

80

100

120

140

160

$000

's

Impact of sensitivities on closing cash [illustrative only]

Basecase Closing Cash Sensitised Closing Cash Headroom

Maximum funding shortfall in period

$Xm


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

FinancierFacility 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.

• Brief interview required with the contractor’s financier to identify:– current relationship with the contractor– history of any covenant breaches or defaults by the contractor– any status changes pending or under consideration– Confirmation of the existence of any other security over the entity.

• Note: The contractor will need to give explicit permission to their bank(s) / lender(s) to discuss their affairs with the reviewer:


Profitability

Example visual representation of profitability & performance

Financial Capacity

506 (370)

(10)(41) (34) (15)

270 305

0100200300400500600700800900

$ 00

0's

NPAT Bridge FY11 to FY12

7,148 7,389 7,895

534 609 735

0.0%1.0%2.0%3.0%4.0%5.0%6.0%7.0%8.0%9.0%10.0%

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

FY10 FY11 FY12

$ 00

0's

Revenue & EBITDA

Revenue EBITDA EBITDA Margin %

1,034 1,139

1,275

13.5%

14.0%

14.5%

15.0%

15.5%

16.0%

16.5%

-

200

400

600

800

1,000

1,200

1,400

FY10 FY11 FY12

$ 00

0's

Gross Margin

Gross profit Gross Margin %

151

141

161

1.8%

1.9%

1.9%

2.0%

2.0%

2.1%

2.1%

2.2%

130

135

140

145

150

155

160

165

FY10 FY11 FY12

$ 00

0's

NWC to Sales

NWC NWC/Sales

Include explanatory comments key observations Include explanatory comments key observations

Include explanatory comments key observationsInclude explanatory comments key observations

[Charts populated for illustrative purposes only]


Profitability

Example visual representation of forecast profitability & performance

Financial Capacity

500 (123)(103) (69) (34) (15)

694850

0

200

400

600

800

1000

1200

1400

$ 00

0's

NPAT Bridge FY12 to FY13

(200,000)

0

200,000

400,000

600,000

800,000

1,000,000

1,200,000

1,400,000

Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun

Forecast Closing Cash

Net Movement in cash Closing Cash

Include explanatory comments key observations Include explanatory comments key observations

[Charts populated for illustrative purposes only]


Glossary

28

GlossaryTerm Definition

AmortisationSimilar 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 (e.g. Licences, patents).

ASICAustralian Securities & Investment Commission (ASIC) is Australia’s corporate, markets and financial services regulator.

CapexCapital 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 (e.g. associated income received). Investments include capital assets such as plant and machinery, as well as other investments related to the financial markets (e.g. 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.

COGSCost 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.

CovenantA promise in an indenture, or any other formal debt agreement, that certain activities will or will not be carried out.

CreditorA party to whom money is owed by the business. (a.k.a. ‘Payables’)

DebtorA party that owes the business money. (a.k.a. ‘Receivables’)

EBITEarnings before interest and tax (EBIT) is a measure of a company’s profitability, calculated as revenue minus expenses, excluding tax and interest.

EBITDAEarnings 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’castAbbreviation for forecast.


Glossary

29

GlossaryTerm Definition

FYAbbreviation 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.

GearingGearing 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 ProfitA company's revenue minus it’s cost of goods sold.

Intangible assetsAssets that cannot be physically touched but which provide economic benefit to the owner. Some examples include goodwill, patents & copyrights.

LiquidityLiquidity refers to the ability to convert assets to cash quickly and easily with limited if any loss in value.

LTMAbbreviation for last twelve months.

NPBTResidual profit after all expenses with the exception of tax.

Net Profit/ NPATNet 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 FlowAll cash inflows (receipts) less all cash outflows (payments).

Net InterestNet interest in the profit & loss statement is calculated as interest income less interest expense.

NTANet 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.

WIPWork 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.


Glossary

30

Glossary

Ratio Calculation Definition

Gross Margin % (Gross Profit/ Revenue) x 100Gross 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 100This 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 100EBIT 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 100Measures 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.


Glossary

31

GlossaryRatio Calculation Definition

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 365Also 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 100Analyses 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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Documents

department assessment

financial capacity criteria

financial assessor

annual financial statement

current financial position

proposed contractor

proposed contract value

contractor revenue na