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Conducting a Fiscal Check-up:
Is Your Business Still in Good Health?
By John R. Barrickman

 Just as your body and your automobile periodically need an examination, it is appropriate to get a financial check-up of your business to be sure all systems are working properly and to detect potential problems before they become expensive or life-threatening.

Comparative analysis
The starting point is with the profit plan you prepared prior to the start of this fiscal year. Did you achieve your sales goal, projected gross profit margin and projected net income? If not, why? Can you explain variances for individual components of the income statement and balance sheet?

Compare this year's results with prior years. To facilitate the comparison, create a spreadsheet displaying individual components of the income statement and the balance sheet for at least three years. Express each component of the income statement as a percentage of sales and each component of the balance sheet as a percentage of assets. This will allow you to see how aggregates and proportions have changed. Can you explain the changes?

Compare your results with industry averages. These can be obtained from your industry trade association or your banker. Ask your banker for a copy of the Robert Morris Associates industry averages for your SIC code. Can you explain variances (e.g., accounting practices, competitive strategy, inefficiencies)?

Income statement
Pay particular attention to the trends in sales, gross margin and overhead. Consider the following:


  • Is growth outpacing inflation?
  • Is growth the result of higher prices or more units sold?
  • Is your mix of products/customers changing?
  • Are there concentrations in one product line or with one customer? If so, what is the impact on margins?

Gross Margin:

  • Is it increasing, remaining steady or decreasing?
  • Is this the result of changing price, costs of goods sold or competition? (You should beware of a shrinking gross margin, especially if overhead is a fixed cost.)


  • Which components are rising as a percentage of sales? Can these expenses be reduced or controlled? (Be particularly sensitive to rising owner's compensation, depreciation/rental expense, and interest expense as a percentage of sales, since these increase breakeven and increase vulnerability to a downturn in sales.)
  • Compare owner withdrawals (e.g., salary, rent, travel and entertainment, perks) with lifestyle. Can you cut back if sales or gross margin decline?
  • Are depreciation, lease and rental expenses rising as a percentage of sales? Are you efficiently utilizing fixed assets? Is too much invested in non-productive fixed assets (e.g., company vehicles, buildings, airplanes)?
  • Is interest expense rising as a percentage of sales? Are you efficiently employing debt?

Balance sheet
To facilitate analysis of key components of the balance sheet, calculate utilization ratios for each of the last three years.

What is the trend? Lengthening receivables and inventory turn may reflect inefficiencies and require additional financing. You can calculate the incremental financing requirement by subtracting the current receivables or inventory expressed in days from prior years and multiplying by one day's sales or cost of goods sold.

Did this incremental investment create more sales, improve the gross margin, or improve your competitive position? If not, it just raised your cost. Consider devoting more time or money to collecting receivables faster and/or managing inventory better.

Other balance sheet issues include:

  • Are fixed assets being properly maintained and replaced as appropriate?
  • Are discounts for early payment being taken? The effective interest rate for failure to take a discount when terms are 2/10 net 30 is 36%.
  • Is short-term debt being liquidated annually or is it really revolving debt? Would it be appropriate to convert all or a portion of it to amortizing long-term debt?

Other areas to examine
Cash Flow - The life blood of any business is cash flow. Carefully review your company's statement of cash flows. Determine where cash came from and where cash went. Divide the cash flows into recurring and non-recurring flows. Be sure recurring cash flows are adequate to pay operating expenses and debt service.

Insurance - An often overlooked element of an annual fiscal check-up is insurance coverage. Are coverages adequate (e.g., property/casualty, liability, business interruption)? Do owners/key managers have appropriate life and disability coverages?

Management - Take a hard look at your management team. Is management adequate but not excessive for the company's current and projected needs? Are appropriate management skills (e.g., sales, production, finance) in place? Is there a formal succession plan in place for key positions?

Another often overlooked element of an annual fiscal check-up is management systems. Do you receive timely and accurate reports to monitor sales, margins, costs, receivables and inventory? Has the sophistication and timeliness of reporting kept pace with the growth of the business?

Next Year - Now is the time to review/revise your business plan. Does it still adequately position the company to deal with the current economic and competitive environment? Does the plan define and capitalize on the company's core competencies and competitive advantage(s)? Are contingency plans in place?

The business plan should be focused on the coming year with a profit plan. Individual line items of revenue and expense should be projected. Ideally, a cash budget would be constructed to project borrowing needs. The profit plan provides the foundation for monitoring performance in the coming year and the starting point for next year's fiscal check-up.

Assurances for now and early detection for later
A comprehensive financial check-up performed annually can provide assurance that your business is still healthy. It can also provide early detection of potential problems that may adversely affect profits and cash flow, allowing corrective action before the condition becomes chronic or, even worse, terminal.


John Barrickman is president of New Horizons Financial Group in Roswell, Georgia, a consulting group specializing in risk management, small business lending, and credit processing. He is also the former president of an Atlanta financial institution.

If you'd like more information about M&T Bank's small business financing options or if you would like to meet with a local M&T small business specialist, call 1-800-724-6070 to set-up an appointment.

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