An assessment of the long term financial health of the firm is an important task for outsiders like chartered accountants, creditors, borrowers, banks, financial institutions, public and shareholders considering the extension of credit and for insiders in their formulation of strategy. History abounds with examples of firms that embarked upon properly ambitious programs and subsequently discovered that their portfolio of programs could not be financed on acceptable terms. The outcome frequently was the abandonment of programs in mid stream at considerable financial and organizational cost to the company, its vendors, its employees, and/or its creditors.
A necessary first step in the evaluation of a firm's financial health is the development of a comprehensive series of questions. It is possible to calculate a multitude of ratios, but unless they relate to specific questions and concerns, their usefulness will be minimal. Furthermore, unless one starts with a clear understanding of the right questions, one's analysis will inevitably be determined by whatever information readily available.
The following represents some of the questions that seem important in assessing the future financial health of the company. The key issue is whether or not the company's goals, strategy, investment requirements and financing capabilities are in balance.
1. Will the company need to raise additional finance over the next year/over the next three to five years to carry out strategically important programs? 2. What are the management's goals of the company? How does it plans to reach these goals? What investments must be made in working capital and in plant and equipment to support the programs? 3. Will the company be a generator of excess cash, or will it be a consumer of cash? How important is its future access to finance from outsiders? 4. Does the company have a seasonal financing need? If so how large is it and what will be the perception of suppliers of finance at the...
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