RSM Australia

Liquidity a problem? Give your business a health check

Check the financial health of your business with a Liquidity Health Check!

Companies relying on historically low interest rates to mask their true capacity to pay bills when they fall due, need to seriously address debt serviceability once the official cash rA liquidity health check can help your business stay solventate starts moving higher which some will say will occur in 2017.

Companies with insufficient cash flow to service a higher cost of debt could face a cash squeeze and ultimately become an insolvency risk.

In addition to rising interest rates, what’s also likely to accentuate cash flow problems in 2017 are more stringent efforts by the Australian Tax Office (ATO) to chase debt levels as low as $60,000 (previously $200,000), plus renewed efforts for GST to be paid on time every time. The net effect of these measures could lead to a record number of companies with unserviceable higher-than-average debt levels. In short, the ATO’s more aggressive approach to tax recovery, coupled with rising interest rates in 2017, could result in serious tightening of cash flow over the next 18-24 months.


To prevent your company from becoming a future liquidation ‘time-bomb’ we recommend running it through regular health checks.

A health check will help to determine how exposed your company is to serious debt serviceability issues as rates rise in 2017, and the options for continuous improvement, especially while it still remains profitable.

A Liquidity health check could prevent escalating liquidity issuesPRACTICAL STEPS TO A BETTER BALANCE SHEET

While it may help more distressed firms from literally going under, a health check could also aid more solvent businesses take practical steps to better manage a higher interest rate environment by improving their balance sheets, overall business performance and better achievement against forecasted key performance indicators (KPIs).

The key is for companies to build sustainability into their business model by creating a strong buffer in operating profits that allows for fixed commitments going forward.


Any liquidity health check using time-honoured critical indicators, quickly takes the pulse of the business to find out if it’s on an upward trajectory or experiencing various stages of decline.

For example, understanding a cash flow statement will indicate whether there’s sufficient cash to pay creditors and employees, invest the excess cash back into the business in order to generate more cash and profits.  It will also highlight whether the business is relying on one-off cash injections from say the sale of assets or if the owners are contributing to the business stress through excess drawings or dividends.

Another vital indicator is the interest cover ratio, which reveals how many times a business can cover its interest bill with its operating profit.

While the higher the number the better, companies should have a minimum ratio of four times, and those with half or less than this should be asking themselves why. For example, is too much short-term cash being used to pay off long-term debt, or is too much cash being taken out of the business by those running it.


Equally important, only with the right systems in place, will you be able to regularly capture a real-time snapshot of how the business is performing against the benchmarks forecasted in the budget.

By focusing on critical indicators, any health check can be used to highlight any divergence in monthly or seasonal trends which may be used to trigger alarm bells. For example, alarm bells should ring if stock is taking longer to turn over or the time it takes debtors to pay is impacting cash flow.

Once these trends are highlighted, the trick is to find out what’s driving them. As a case in point, are sales dropping due to greater competition, a broader economic slowdown or other factors. Similarly, how much of a squeeze in profit margins is due to competition and rising costs.


There’s little point running a liquidity health check on your business if you’re not going to act on any warning signals. 
It’s important not to wait until any condition is terminal.

To ensure they get completed in a timely manner, it often pays to seek outside help to both establish the right health checks and then act on any issues they might throw up.


Peter Saccasan
National Head of Business Advisory
Peter Marsden
National Head of Restructuring & Recovery