What is a financial viability analysis? 

A financial viability analysis assesses the ability of a business to meet operational and debt repayments, deliver on its commitments, adapt to industry wide challenges and uncertainty, and remain financially sustainable.

Why is assessing financial viability important?

Assessing the financial viability of your suppliers and counterparties - current and prospective, is likely to be beneficial to your overall vendor management and risk processes.  

On a commercial angle, it can be used to evaluate the financial risk of the party in which you are engaging in a financial transaction.  Undertaking this assessment at the commencement of any long term contractual agreement can help reduce the risk of partnering with a party that may not fulfill their contractual duties to you over the life of a contract.

Key considerations when preparing a financial viability analysis

Context is key when conducting a financial viability assessment. The overall assessment should be an on-balance assessment taking into account the assessment of various indicators.  It is not necessarily the case that each indicator will be of equal ranking.  Some factors may outweigh others, including relative size.

Throughout the assessment, it is important to consider the financial viability within the given industry the business operates within. 

Here are some key questions we deem important when assessing the financial viability of your counterparties:

1. Is the new contract a significant change to the existing operations of the counterparty? Is this new contract a ‘stretch’ to achieve? What proportion of revenue is this new contract compared to its existing revenue? Will the business have sufficient working capital and cash flow to enable the contract to be completed?

2. Is there a history of completing contracts profitability? Does the party have any loss-making contracts? Have these been explained?

3. Is the business appropriately leveraged? A company that predominantly finances their assets with debt is likely exposed to greater financial risk and vulnerability. 

4. Can the business service their debt? One way to assess debt servicing ability is the debt to EBITDA ratio - a poor debt to EBITDA ratio directly correlates with poor financial viability as it suggests lack of cash flows to keep the business going and operate profitably.  

5. Is the entity currently engaged in any legal disputes, or subject to any adverse media? Previous and/or pending court or legal actions can not only be costly and distracting for management, but may also be evidence of issues in delivering on its commitments, and ongoing sustainability

6. How is their internal governance? Does management have the capacity and financial prudence to make financial decisions in the best interest of stakeholders? Has there been any recent and/or major change in management? This is important when considering an entity’s viability - the performance and capacity of any company ultimately comes down to the decisions made by management.

The above is not an exhaustive list and each situation is assessed individually. Our Business Restructuring Services team has significant experience with undertaking financial viability assessment reviews. We can work with you to make an informed decision specific to your business.