Is it time for a Financial Health Check

Feb 18 2021 Financial Management

We’ve all heard the old adage ‘prevention is better than cure’. It’s usually used in relation to your health, but it can just as easily be applied to the health of your business, especially in the current Covid dominated economy. Getting an expert opinion and treating those niggling issues before they become major problems that are both difficult and costly to fix is often a better approach.

That’s why EFM recommends that all businesses should consider carrying out a financial health check every year. It’s a chance to take a step back from the day-to-day running of your organisation and look at it with fresh eyes. The assessment asks you to answer various questions about your business’ financial management, looks at different aspects of current performance and, critically, the factors that determine future success.

It identifies areas for improvement, giving you the chance to act before they become weak points that may threaten the very success of your business. EFM also offer a cashflow health check assessment, to help alert you to situations that need to be addressed, giving you a better idea of where your money is, and how to stay in control.

By following a series of practical steps, you can take control and successfully navigate through this period of uncertainty – emerging stronger on the other side. The steps below apply equally to all companies, regardless of whether they are responding to the immediate crisis or looking to learn long-term lessons as to how they can run a better business:

Financial Position

Assess the current state of your business finances

By understanding your liquidity, cash flow, profitability and the strength or otherwise of your balance sheet, you will be better positioned to make informed decisions about the future. For instance, have you got enough cash to trade in the short and medium term? Are your margins under pressure? Have you got surplus or under-utilised assets?

Understand and forecasting your revenue streams

Look at the make-up of your business both with existing customer activity and future pipeline – specifically how much revenue is generated by new business as opposed to recurring revenues from existing customers. This will allow you to better understand where your revenues are coming from, and whether you need to focus on strategies to retain existing clients and / or attract new business in order to hit the levels of income you’re seeking or need to generate the profits you require. Take the current business position and extrapolate a number of likely ‘what if’ market scenarios that could impact your business and see what the effect on revenue streams and cash balance would be.

By undertaking this stress testing exercise, you will better understand the critical points in your business model, along with the timing of financial issues that could arise. Once you’ve identified what the key problem areas could be, you can begin to formulate plans that could be used to address or mitigate these issues. Can I increase sales without increasing marketing cost? Do I need to increase other costs to support more sales? Just because I sell more, will it improve my bank balance?

Other things to consider are do you know who are your most profitable customers? Do you know which are your best-selling products? Do you know where your next customer will come from?  If you are able to answer these questions, you will have a better understanding of where you should be focusing effort and resources in order to maximise your profits.

Understand your cost base

Careful consideration needs to be given to expenditure. Reviewing, listing and prioritising current outgoings is a worthwhile exercise and helps you assess what are essential services and those which are “nice to have”, and possibly identifying those that are no longer being used. From this you can establish which business costs will have a material effect on the business if they are reduced or removed and can make informed decisions if you need to cut expenditures.

People costs are often one of the largest and most sensitive costs and any change needs to be considered carefully with the appropriate advice. Can I reduce workforce numbers? Can I cut pay? Can I replace immediate salary costs with a share option scheme or with performance driven bonus schemes? Third party costs can also be major components of a company’s cost base, and longer-term relationships can make actioning changes to activity problematic.  Asking such questions as what’s my contractual position with suppliers and considering putting out tenders rather than simply rolling agreements over can help.

Consider your supply chain – has the disruption  caused by Brexit and Covid to international shipping sector meant that you can no longer depend upon receiving key components when they were scheduled to arrive?  Has the impact of Brexit meant that you now have to pay duties and complete additional paperwork on goods entering and leaving the UK? Are you able to replace overseas suppliers with businesses based in the UK to mitigate some of these issues, and if yes, what is the impact on costs?  Given that Covid has acted as a catalyst for change (e.g. the move to online retail has been accelerated, homeworking is now firmly established as a viable way of working) businesses need to look at their processes and consider how they react to, and embrace these changes.

Business Volumes

Protect business by engaging, reassuring and supporting customer

Make sure you keep good lines of communication in place with all customers.  By doing this you should be able to pick up leads on possible sales opportunities if they are growing or diversifying and engage with them if they are looking to cut down activity, to see if you can still sell them something rather than losing them as a client. Do you know why you orders have suddenly dropped off from a major customer? Do you know the credit worthiness of your customers? Are any of your customers likely to either take over or be taken over by other companies (and if yes to the latter, will your customer help you get an introduction to the new owner to enable you to pitch your business)?

Generate new business from your existing customer base

It’s generally a lot easier to sell to an existing customer than it is to find a new client.  Tap into existing customer relationships – suggested areas could include:

  • Reaching out to clients approaching the end of a contract or production run;
  • Using your knowledge of the customer, seeing if there are newer products in your range that might suit the client, or whether being more flexible with them, such as introducing call off / “just in time” arrangements or payment terms might be beneficial;
  • Seeing if you can sell related products (e.g. support contracts or consumables) to current users.


Talk to suppliers about the support available

Approaching suppliers to ask for payment holidays or price reductions rather than outright cancellation may allow for services to continue whilst mitigating the immediate cost burden. However, caution is advised as a balance needs to be struck to avoid building up problems for a later date, as debt will ultimately need to be repaid. Be aware that suppliers may also be struggling too and may only have limited capacity to help.

Furthermore, when you are considering cancelling services, ensure you have fully considered the operational and legal impacts on your business (not least, whether there are any penalties from exiting a contract early). When considering changing suppliers to obtain lower costs, you need to ask a number of questions. Will a new supplier offer me better payment terms? Can a local supplier deliver more quickly and hence speed up customer invoicing and allow for a reduction in inventory levels? Are their products of a suitable quality, and / or compatibility with yours?

Engage your funders about finance options

Talk to your bank or third-party funders about financial help, if needed, or the possibility of payment reductions or holidays on any existing loans or overdrafts. Do you have a cashflow forecast to show them how things improve? Do you know how much you need and for how long? Do they have different and more suitable financing products? The earlier you talk to them, and the more credible your forecasts are, the more likely it is they will engage with you. Don’t underestimate the time lag between applying for additional funding and the cash hitting your bank account – too many businesses leave things to the last minute.

Consider your business structure to preserve cash

In addition to support mechanisms being offered by the Government, consider if there’s anything else that can be done or if there are other grants and schemes which you might be able to access.

Other things you might want to consider could include:

  • Restructuring director remuneration (possibly offering contingent future share options as a way of recognising / retaining loyalty)
  • Dividend suspension
  • Deferral or suspension of bonus payments
  • Agree tax deferrals / payment plans
  • Exploring whether your business is eligible for R&D tax credits

EFM are here to run your financial healthcheck

Business owners can receive a full financial healthcheck and get the bespoke support they need in outsourcing their finance & accounting services to EFM – if you are interested in taking advantage of this free service, you can kick off the process by completing our financial management healthcheck. Our nationwide team of experienced and multi-sector finance professionals range from Financial Controllers, to, BookkeepersCredit Controllers & Payroll Managers.

To find out more around how EFMs tailored financial management services can benefit your company, get in touch. Contact us via [email protected] or call 01582 516300 to set up your free one-hour consultation.

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