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Financial analysis checklist

Sarah Stowe

Especially if you are purchasing a more complex business, itÍs a good idea to create a snapshot of the most important financial information and trends over the past few years. Some of the things that allow you to gain a
better understanding of the core elements of the business are:

Sales trends – Are sales growing, stable or has there been a downturn?

Gross profit – What are the trends in gross profit percentage and what has caused this? Do you expect the trends
to continue?

Net operating profit – Is the business producing a consistent profit in dollars and as a percentage of sales? This indicates the business is trading well, and can give you more confidence of a reliable stream of income into the future.

Cash flow – Just because a business is profitable, it doesnÍt mean that the cash flow will be good. For example, if a business takes a long time to collect its debts, or stock turns over slowly, itÍs likely that cash flow will be a problem. If the business has not been run with strong cash flows, then this will affect what you decide to pay for it. A business with strong cash flow is usually worth more than one where thereÍs work to be done in this area.

Other business indicators
ItÍs also important to check the compliance and taxation obligations of the business have been met. Delays in the lodgement of forms or late payment of tax obligations can indicate cashflow issues, or deeper liquidity problems within the business. These can have a negative effect on the value of the business.