In financial due diligence, the following 25 questions would aim to dissect the financial health and sustainability of the target company, along with the validity of its financial projections:
1. Can you provide a detailed breakdown of your revenue streams for the past five years and explain any significant fluctuations?
2. How does the company’s gross and net profit margins compare to industry benchmarks, and what factors influence these margins?
3. Could you walk us through your income statement, particularly noting any non-recurring or one-off items?
4. What is the company’s current cash flow situation, and how has it trended over the past several years?
5. Can you explain any significant changes in your balance sheet, especially in terms of debt levels and asset valuations, over the last few years?
6. How have you projected financial performance in the coming years, and what assumptions underlie these projections?
7. Can you provide bank statements for the past three years to verify cash reserves and cash flow consistency?
8. What have been the findings of the most recent audits, and were there any qualifications or areas of concern?
9. Could you detail your schedule of bad debts and write-offs and explain the allowance for doubtful accounts?
10. How are accounts payable managed, and what are the average payment terms extended by suppliers?
11. What accounting system is currently in use, and how reliable and scalable is it?
12. Can you provide details of all leases, including terms, conditions, and any contingent liabilities?
13. What is the valuation of your inventory, and how do you manage inventory turnover and obsolescence?
14. Can we review contracts for materials or major inputs to understand terms and any associated risks?
15. How are product margins trending, and what are the main factors affecting these trends?
16. May we examine a selection of customer contracts and invoices to understand revenue recognition practices and terms?
17. What is the current customer acquisition cost, and how has it changed over time?
18. How do you calculate customer lifetime value, and what trends have you noticed in this area?
19. What is the customer turnover rate, and what retention strategies are in place?
20. How is intellectual property valued on the balance sheet, and what protections are in place for it?
21. Can we review the Quality of Earnings report to understand the sustainability and quality of earnings?
22. What are the most significant risk factors identified that may hinder future growth?
23. If the company's biggest customers canceled their contracts, how would this affect financial projections?
24. How would the loss of a major supplier impact operations and financial health?
25. What are the company’s working capital needs, and how does it manage working capital efficiency?
These questions are designed to scrutinize the accuracy of the financial data provided, evaluate the sustainability of the company's financial health, and assess potential risks that could affect future growth and profitability.
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