Dangerous ‘Health Check’

There is only one thing worse than bad figures and that’s a bad interpretation of those figures. It compounds the problem. Or at least I thought so until today when I saw a ‘Health Check’ report that Kashflow is delivering to its customers.

The report is unsound and unreliable. It provides no explanation as to how the numbers were arrived at or the interaction between them. That’s why we have professional accountants and not people who put their finger in the air. Whomever Kashflow consulted needs a lesson in cash management because this report is not it.

The report says:”This Health Check looks at a number of different factors in your business that can be used as an indication of how healthy your business is. Each factor is scored individually and then some additional information is given on how you can improve your score. At the end of the report is an overall score for your business.”

There is no clue as to how the numbers come together or how different industries are assessed. This is a fundamental weakness.

The first piece: ‘money in the bank’ looks at an average, trebles it and concludes that because the ‘customer’ has considerably less that there is a real problem. The assumption is that the business needs three months cash. Why? Alongside, a graph is shown indicating that average balances are falling fairly steeply and is well below the figure asserted to be on hand. Where is the assessment of why that might be? This turns into a ’score’ of 30%

The next piece of information talks about the largest customer being responsible for 21% of revenue. Nothing is said about their ability to pay but the 21% reliance is assessed as ‘not being anywhere near the danger zone.’ What is the threshold? Given the decline in bank balance, to what extent can that be attributed to this large customer? This scores 80%

Finally, we are told that out of 244 customers, 45% of them have only bought once, 37% have bought 4 times or more and 20% have bought 8 or more times. This is utterly meaningless without a corresponding assessment of sales value per transaction and both the average and spread of deal values.  How for example is our ‘customer’ going to treble his bank balance, if that is indeed the recommendation when there is so little monetary data in this last set of figures? Nevertheless, this translates into a score of 40%.

The overall score is said to be 57%. I have no clue what this is meant to represent because different elements in the equation would have different weightings at different points in time. Neither is it explained. In times like this, customers need explanations so they know where to concentrate their efforts.

There is no assessment of days sales outstanding, neither is there any analysis of the creditor position. Neither is there any peer comparison. Credit conditions vary around the country so what might appear poor overall might be regarded as average in another context.

Kashflow has tried hard to arrive at something that might be useful to business. They are to be applauded. But thie outcome is dangerously inappropriate. Far better to obtain a copy of a CIMA report on cash management which is easy to read and which provides research based benchmarking data against which to assess your business. It also provides solid tips as to what to do.  It is a little dated so some of the broad assumptions might need adjusting.

Better still, get your professional advisor to walk you through what each element means and why it is important.

Financial analysis is not easy. It takes significant skill. Assessing credit risk is similarly difficult because we inevitably have partial information. But professionals know how to make this come together. It’s something I bult my practice upon.

Tagged as: Benchmark, Cash management, DSO, Financial analysis, Health Check