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A Guide to Viability

Viable, productive enterprises that consistently generate strong earnings provide jobs and pay taxes – they help Britain prosper.

 This simple guide seeks to support an understanding of financial viability; we hope it will prove useful in discussions with advisers and influence business thinking, in particular in situations where a business is experiencing a challenging financial environment.

So what is Viability?

Viability is a commercial judgement of the ability of a business to meet ongoing financial obligations, with an additional margin of comfort to support future investment and trading.

Viability starts with Earnings, however there are other aspects to consider including Cash FlowNet Worth and Balance Sheet Strength, Financial ProjectionsFinancial Trends and Non-Financial Factors. Finally having a trusted Financial Support Team around you is valuable. We explore each of those areas below.

  • EBITDA is a commonly used measure of earnings or underlying profit. It is calculated by adding back depreciation, amortisation and interest to the net profit, to which we then deduct dividends or drawings when assessing viability.

    If your EBITDA exceeds the demands on earnings consistently over a number of trading years, then that is an indicator of viability. EBITDA is not the sole measure and has its limitations but it is a good start in the evaluation process.

    There are variations on how EBITDA can be calculated, but for simplicity an example EBITDA calculation is:

    Items / Amounts

    Year 3

    Year 2

    Year 1

    Items / Amounts

    Net profit before tax

    Year 3

    200

    Year 2

    300

    Year 1

    400

    Items / Amounts

    + Depreciation and amortisation

    Year 3

    100

    Year 2

    100

    Year 1

    100

    Items / Amounts

    + Interest

    Year 3

    60

    Year 2

    50

    Year 1

    50

    Items / Amounts

    - Drawings / Dividends

    Year 3

    250

    Year 2

    225

    Year 1

    225

    Items / Amounts

    (A) Adjusted Profit “EBITDA”

    Year 3

    110

    Year 2

    225

    Year 1

    325

    In this example over three years the EBITDA has reduced. We then need to consider the demand on the business’s earnings such as loan payments, interest, and hire purchase payments.

    Item / Year

    Year 3

    Year 2

    Year 1

    Item / Year

    Interest

    Year 3

    60

    Year 2

    50

    Year 1

    50

    Item / Year

    Bank capital repayments

    Year 3

    100

    Year 2

    100

    Year 1

    100

    Item / Year

    HP  and Other Loan capital repayments

    Year 3

    75

    Year 2

    75

    Year 1

    75

    Item / Year

    (B) Debt to be serviced

    Year 3

    235

    Year 2

    225

    Year 1

    225

    Surplus or Shortfall

    Surplus or Shortfall

    (A) - (B)

    -125

    0

    100

    In this example the business's EBITDA is in decline, yet the demands on its earnings remain significant. In Year 3 there is a material shortfall.

    Whist this calculation offers a guide to viability, please be aware it does not include net movements in working capital (stock / debtors / creditors), tax paid or business investment such as capital expenditure not funded on HP.

    Rather than focussing on EBITDA, a more complete picture can be formed by calculating the Cash Flow available for Debt Service (CFADS) which means your EBITDA plus or minus net movements in working capital, less tax paid and capital expenditure paid (net of capital expenditure funded by asset disposals and/or hire purchase and/or finance leasing).

  • Whether a business has sufficient capital to meet all its obligations as they fall due is a key test of solvency and centres on the cash flow (sometimes called liquidity). Forecasting cash flow over a 13 week period and again projecting over a 12 month period using reasonable assumptions can help management answer that test.

  • If a business's assets exceed its liabilities it can be said to be balance sheet solvent. In simple terms, if the Net Worth is increasing then that is a positive sign, if it is in decline then the business may be surviving by living off capital, which cannot continue indefinitely. However if the balance sheet is strong, it can shield a business from a downturn for some time, giving the owners the time to implement a turnaround strategy.

  • Forward looking statements, such as projections, prepared on an integrated profit and loss, balance sheet and operating cash flow basis can, when using reasonable assumptions, support the understanding of the impact of decisions you can take within your control (such as capital expenditure or gross margin adjustment) and the impact of risk factors outside your control, such as an increase in a key cost.

  • The trend of your Earnings, Cash Flow and Net Worth over a period of years will influence a lender or credit agency in their assessment of whether your business is consistently viable and that can have an impact on the credit terms you receive from your suppliers.

    However a third party’s judgement on viability is not just measured by financial trends, but is supplemented by a commercial judgement of the economic outlook, sector you are in, risks applicable to your business, management actions and experience.

  • Your business may have an in-house Finance Director or Manager or may rely on support from accountants or advisers. Whatever form that takes your Financial Support Team should have access to the information which can then be used to build the financial picture of your business. Specialist advice may sometimes be necessary when a business is either undergoing a period of change or is facing challenging conditions.

    We will work with you and your Financial Support Team to review your funding and financial structure.

Get in touch

If you are experiencing any financial difficulties it is important that you contact your named Relationship Manager or call our business management team on 0345 072 5555 as soon as possible, as well as get independent legal and financial advice.

We are available from 8am to 8pm Monday to Friday and 9am to 2pm on Saturday.

Support through financial difficulty

We understand our customers may face a range of different problems but most of these will impact on revenue and short-term cash flow requirements.

Lloyds Bank is committed to helping customers find a way forward if they are experiencing financial difficulty.

Improving Cash Flow

Steps that can be taken to provide short term relief during times of cash pressure.

Disclaimer

While all reasonable care has been taken to ensure that the information provided is correct, no liability is accepted by Lloyds Bank for any loss or damage caused to any person relying on any statement or omission. This is for information only and should not be relied upon as offering advice for any set of circumstances, including in connection with any existing facility or application for finance. Specific advice should always be sought in each instance.

Important legal information

Lloyds Bank plc. Registered office: 25 Gresham Street, London EC2V 7HN. Registered in England and Wales No. 2065. Lloyds Bank plc is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority under registration number 119278. Telephone: 020 7626 1500

This page provides you with a broad overview of how the financial viability of a business can be assessed. It is not designed to constitute legal or financial advice and it is recommended that you always seek independent legal and financial advice.

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The Lloyds Banking Group includes companies using brands including Lloyds Bank, Halifax and Bank of Scotland and their associated companies. More information on the Lloyds Banking Group can be found at lloydsbankinggroup.com.