Department of Finance and Services

Department of Finance and Services “Comprehensive” Financial Capacity Assessment Template • [Contracting party] • January 2013 • ABN [xxx xxx xxx]

Recommendations and Conclusions Executive Summary Recommendations: [Contractor] Pty Ltd to be [accepted/rejected] for the proposed tender, with tender value limited to $[X]m dependent on the department assessment criteria (AND major factors influencing the recommendation).

Contract summary & assessment criteria • Financial Assessment Matrix • The criteria for report level selection is based on both the contract size and the annual revenue of the contractor shown above. • The proposed contract value totals $[X]. The proposed contractor had revenues in FY12 of $[X]m. Therefore a “Medium Assessment” has been undertaken. • Note: Any other work with the department currently being tendered for needs to be considered in aggregate. Contract Summary Unless the review is performed shortly following year end, the annual financial statement may not be an accurate reflection of the current financial position of the contractor. The DFS criteria should be applied to the most recent month end balance sheet available which in some cases will be sourced from recent management accounts as opposed to annual financial statements. NB - the reviewer will need to consider any significant adjustments necessary most notably classification of related party receivables between long term and short term, which can significantly impact the working capital criteria. • The following rule should be followed by the financial assessor: • If the most recent year-end financial accounts are < 6 months old, the revenue from these accounts should be compared to the thresholds of the financial assessment matrix. • If the most recent year-end financial accounts are > 6 months old, the revenue recorded in the current year to date should be annualised and compared to the thresholds of the financial assessment matrix. (e.g. if 7 months of revenue data is available, this can be annualised by multiplying by 12/7). DFS Assessment Criteria

[The executive summary is to be used to summarise key findings and risks identified in the main body, and to assign risk weightings for each category. Commentary should be of sufficient detail to justify the risk weighting assigned. On completion we would expect it to be no more than 5 slides in length] • Understanding the contractor’s ownership and structure Executive Summary Risk Definitions: Low Risk Medium Risk High Risk

Understanding the contractor’s ownership and structure Executive Summary Risk Definitions: Low Risk Medium Risk High Risk

Understanding the contractor’s business Executive Summary Risk Definitions: Low Risk Medium Risk High Risk

Understanding the contractor’s financial capacity Executive Summary Risk Definitions: Low Risk Medium Risk High Risk

Understanding the contractor’s ownership and structure Ownership and Structure • Float (if applicable) • [ ] family trusts and other holding structures • [ ] Institutional shareholders XX% XX% XX% [Contractor] Group Holdings Pty Ltd X% X% X% XX [Contractor] Pty Ltd XX Pty Ltd X% X% X% [Cross Guarantee $Xm] XX Services Pty Ltd XX XX • Update group structure as applicable • Note any guarantees, charges or other relevant security between group entities and related parties and the magnitude of any such security.

Understanding the contractor’s ownership and structure • Management Structure (if relevant) Ownership and Structure [Executive Director] [Sales Manager] [Finance Manager] [Marketing Manager] [HR Manager] [Financial Accountant] [Management Accountant]

Understanding the contractor’s ownership and structure Ownership and Structure • Factors to consider: • Is the Directors / Management’s experience and expertise sufficient to demonstrate capability to undertake the proposed contract? • Have the directors previously been involved in businesses which have entered financial difficulty and/or financial insolvency proceedings? • If so, is there any evidence of behaviour or management practices related to that situation which would be regarded as unsatisfactory? Unsatisfactory practices could include: • failure to have addressed financial difficulties before those issues became terminal • taking on high risk strategies and projects without appropriate capability and financial resources • financial misconduct or breach of directors’ duties.

Performance and Profitability • Profit & Loss Financial Capacity • Performance history • Commentary should be around profitability and trajectory aimed at identifying; • Trend of revenue (growing or contracting) • How movements have translated to profitability through: • Margin trends (improved or deteriorated) • Overhead movements (increased/decreased) on an absolute basis and as a proportion of revenue. • Factors to consider: • Interpretation of movements as to whether favourable or unfavourable in nature. • Explanation of the causes or key drivers of significant movements identified. • e.g.- Deteriorating margins could be indicative of issues with project management or execution and therefore evidence of increased risk to successful execution of the proposed contract. • Example wording: • ABC has been profitable for the last three years. • Revenue has grown from $[X] in FY10 to $[X] in FY12 ([X]% on an annual basis). • Gross margins fell from X% to X% owing to tightening tendering conditions • NPAT increased from $[X] in FY10 to $[X] in FY12. Source: 1) FYXX & FYXX: Audited accounts 2) FYXX: Management accounts (unaudited) [Note: Where recent full year data is not available, financial information presented to include YTD results.]

Normalisation of earnings • Performance and Profitability The contractors business • One off and non-recurring items (Normalisations) • This section aims to identify any non-recurring or one-off income or expenses that occurred in the historical period which are not representative of normal operations. This provides a more appropriate measure of historical earnings to compare forecast earnings against. Factors to consider: • Were any expenses incurred due to natural disasters or other events that could not have reasonably been predicted or mitigated? • Were any items of income earned which are not representative of ‘normal‘ operations going forwards?

Work on hand & pipeline • Performance and Profitability The contractors business • Current work on hand • This section aims to identify projects on hand (being undertaken) by a bidder, their current status, and the extent of secured work remaining. Factors to consider: • How significant is the level of secured work going forward? (e.g. – compare to annual turnover). • A small proportion demonstrates limited secured work and potentially higher risk. • Conversely, a company with a disproportionately large number of projects in progress may not have the capacity to take on additional projects. • Have any issues (e.g. delays or costs over runs) been experienced on jobs in hand? • What was the nature of those issues and how have they been resolved / mitigated going forwards? • Pipeline [if available] Factors to consider: • Opportunities identified in the pipeline may include a ‘probability of success’ – consider the historical win rate vs. forecast run rate. • A small pipeline value in relation to annual turnover (after applying the historical win rate), may indicate a shortfall in future work. • Does the pipeline contain opportunities of the size and nature that are within the contractors proven capabilities? • Is there an appropriate basis for inclusion of each opportunity in the pipeline?

Contractor and supplier concentration • Performance and Profitability The contractors business • Customer concentration • This section aims to identify any apparent over reliance on a limited number of customers and any mitigating factors. Factors to consider: • Identify the key customers from which revenue is generated and comment on the concentration. • A high percentage of revenue generated from only a handful of customers suggests possible overreliance. • If apparent overreliance is identified, consider the financial position of those customers relied upon. Risk will be increased if they are experiencing any financial difficulty. • If a pipeline is available, comment the extent to which concentration is expected to increase or decrease going forwards. • Project margins • This section aims to identify any significant instances of cost overruns / mismanagement of projects, evidenced by significant variations in margins or the existence of loss making projects. • Consider the consistency of margins achieved on completed projects and Management explanations for variances. • Supplier concentration • This section aims to identify any apparent over reliance on a limited number of Suppliers and any mitigating factors. Factors to consider: • Are supplies sourced from many or few suppliers? If concentrated, are supplies generic or specialist in nature? • If specialist supplies, are they used in a manner which is critical to their contracts? • If only available from few suppliers, are any contingency plans in place to mitigate breaks in supply? • For suppliers identified as key to the contractor: Is there any indication of financial difficulty or distress? • NB If generic supplies; alternative supply likely to be readily available, even if currently only sourced from one or few suppliers (therefore low risk).

Cash Flow & Liquidity • Financial position Financial Capacity • Factors to consider: • Interpretation of movements as to whether favourable or unfavourable in nature. • Explanation of the causes or key drivers of significant movements identified. • Relativity of measures e.g. comparison of debtor/creditor days to the contractors general terms or industry parameters and note whether acceptable. • Any unusual movements between periods that might reflect; • liquidity pressure, • issues with collection on a project that may relate to performance or customer liquidity, • unsustainable creditor stretch. • Level of debt (consider financing ratio’s above vs. industry averages and whether appear excessive ) and the source of debt (i.e. external lender or related party loans?). • Financial position and Liquidity • Commentary should be around net asset position, working capital and cash, and their associated trajectories, aimed at identifying; • Any actual or near balance sheet insolvency issues • The level of cash available and the level of debt • Trends in key working capital ratios including: • Current ratio (improved or deteriorated) • Debtor days, WIP/Inventory Days and Creditor days (improved or deteriorated) • NWC as a proportion of sales (increased or decreased) • Note any material related party receivables / payables / loans. Source: 1) FYXX & FYXX: Audited accounts 2) FYXX: Management accounts (unaudited)

Cash Flow & Liquidity • Cash flow Financial Capacity • Cash flow • Commentary should be around cash generation and trajectory aimed at identifying; • Is the business generating cash from operating activities? • What’s the trend (increasing or decreasing)? • Were there any significant borrowings or repayments in the period? • How much CAPEX was made in the period? • The level of net cash flow and resultant headroom vs. facilities available. • Factors to consider: • Was operating cash flow generated predominantly earnings driven (sustainable) or working capital movement driven (non-sustainable)? • How much cash has been extracted as dividends by the businesses owners? Is the amount appropriate and sustainable? For example dividends that exceed say 75% of profit may result in the business being undercapitalised. • Was the level of CAPEX one-off in nature or is it recurring? Is CAPEX sufficient to maintain the asset base of the business (Comparison to Depreciation expense)? • Interpretation of other movements as to whether favourable or unfavourable in nature. Source: 1) FYXX & FYXX: Audited accounts 2) FYXX: Management accounts (unaudited)

Cash Flow & Liquidity • Working Capital Management Financial Capacity • Debtors Ageing • This section aims to identify any potential debtor recoverability issues . • Table to illustrate the breakdown of debtors between customers, the ageing of the accounts due and therefore whether there are any customer specific ageing issues. • Factors to consider: • Comparison of the ageing of debtors to contractual terms (credit offered to customers). • - Accounts aged beyond the credit period offered could indicate a recoverability issue. • Significance of the size of aged balances to the business. • Example wording: • With the exception of $[ ]k receivable from Debtor 5, all debtors are less than 60 days old and are therefore within an acceptable range of 45 day credit terms. • Creditors Ageing • This section aims to identify any potential stretch in creditors. • Table to illustrate the breakdown of creditors between customers, the ageing of the accounts payable and therefore whether there are any supplier specific ageing issues. • Factors to consider: • Balances aged beyond normal trading terms across a number of creditors may indicate liquidity pressure or unsustainable credit stretch. • Aged balances specific to one or two suppliers could be more indicative of disputed amounts as opposed to cash flow problems but should be investigated. • Example wording: • Ageing is within an acceptable range of average terms of 30 to 45 days with the majority of balances aged less than 60 days.

Forecast • Forecast review Financial Capacity • Profit and loss forecast • Commentary should be around profitability and trajectory aimed at identifying; • Trend of revenue forecast (growing or contracting) - how does this compare to the historical period? • How movements are forecast to translate to profitability through: • Margin trends (improved or deteriorated) • Movements in the level of overheads (on an absolute basis and as a proportion of revenue) • Cash flow forecast • Commentary should be around cash generation and trajectory aimed at identifying; • Is the business forecast to generate cash from operating activities ? • What’s the trend (increasing or decreasing) - how does this compare to the historical period? • Are there significant monthly variances in cash generation? • Are any significant additional borrowings, repayments or equity injections forecast? • Factors to consider: • Is operating cash flow forecast to be earnings driven (sustainable) or generated through release of working capital (non-sustainable)? How does this compare to the historical period? • Is there a funding need or limited headroom forecast based on existing facilities? Are there any mitigating factors already built into the forecast (e.g. increase borrowings, equity injection). How certain is the timing and amount of any such mitigating actions? Source: 1) Management forecast

Forecast assumptions • Forecast assumptions Financial Capacity

Forecast assumptions • Sensitivities Financial Capacity • Commentary • The sensitivities and their impact will vary on a case by case basis. Examples of sensitivities that could be included are: • A 15% reduction in turnover • 7 day change in debtor / creditor days • a 20% reduction in project margins (GM 20% reduced to 16%) • a 10% increase in overhead costs

Financing facilities • Facilities schedule as at [Date] Financial Capacity • This section aims to identify the funding facilities and headroom currently available to the contractor and any scope for additional or alternative funding should it be required. • Available facilities and funds • Factors to consider: • Do facilities expire during the life of the contract and are they expected to be extended on similar or better terms? • Do facilities include covenants and are they currently and forecast to be in compliance with those covenants and other terms? • Do they have sufficient headroom (available cash and extent of undrawn overdraft to fund the business forecast or absorb a shock or reasonable variance from forecast? • If the contracting entity required access to additional debt financing this requires an assessment of: • the status of the contractor’s relationship with its financier and willingness to provide additional finance • existence of offers of finance from new financiers • whether the business gearing levels are within reasonably acceptable levels indicating capacity to borrow further funds. • If financial support is required from shareholders, key considerations are: • The capacity (ability & willingness) of current or new shareholders to contribute additional equity which will be a function of their own financial capacity and view on price and risk. • Brief interview required with the contractor’s financier to identify: • current relationship with the contractor • history of any covenant breaches or defaults by the contractor • any status changes pending or under consideration • Confirmation of the existence of any other security over the entity. • Note: The contractor will need to give explicit permission to their bank(s) / lender(s) to discuss their affairs with the reviewer:

Profitability • Example visual representation of profitability & performance Financial Capacity [Charts populated for illustrative purposes only] Include explanatory comments key observations Include explanatory comments key observations Include explanatory comments key observations Include explanatory comments key observations

Profitability • Example visual representation of forecast profitability & performance Financial Capacity [Charts populated for illustrative purposes only] Include explanatory comments key observations Include explanatory comments key observations

Glossary Glossary

Department of Finance and Services