Pretax Profit. Fixed Assets. Short Term Borrowing. within one year.

Transcription

1 Definition of Terms THE ORIGINS OF THE PLIMSOLL MODEL Company Registration Number & Name The 'company registration number' identifies the company. All limited companies must show their registration number on their letterhead paper. It is illegal not to do so. Registered Office Address The 'registered office address' is the company's official address where official records are kept. Date of Incorporation A newly incorporated company has up to 22 months from the date of incorporation before it has to file its maiden accounts. Auditors The name of the company's auditors & their remuneration. Principal Shareholders The principal shareholders of each company are highlighted in the report in order to show who controls the company. Bulk List In the case of public limited companies, principal shareholders may be listed as 'bulk list'. This simply means that the list of shareholders is too large & changes too frequently to list within the report. Holding Company When there is a majority shareholding by another company, the company is named under 'Holding company' unless it in turn is held by another company - 'the Ultimate Holding Company'. COMPANY ACCOUNTS Total Sales Includes all income derived from the principal activities of the firm, net of VAT i.e. UK sales, exports, overseas sales, inter-company sales. Directors Fees Will include pension payments & other monetary awards. Gross Profit The margin left after cost of sales has been deducted from total sales. Value Added Employee Remuneration plus trading profit. Trading Profit Pretax profit + total interest charges + depreciation minus non-trading income. Exceptional items are included if disclosed separately. Depreciation A measure of the wearing out, consumption or other losses of value of a fixed asset arising from use, the elapsing of time or obsolescence through technology & market changes. Amortisation, if broken down, is not included. Non-Trading Income All non-directly trade related income such as income from quoted and unquoted investments for most industries, i.e. interest & dividends receivable. Transfer from capital reserve & interest relief, grants, dividends from non-consolidated capital reserve & interest relief, grants dividends from non-consolidated subsidiaries & royalty income. Non-trading income will be given net of non-trading expenses. Trading Profit The net trading profit figure after deduction of all operating expenses. Total Interest Charges Gross interest paid by the Company. It should be noted that many either do not disclose this figure in full, or aggregate short-term, long-term & hire purchases interest together. Many loans from group interest payment may be taken as royalties or management charges. Pretax Profit The net trading profit figure after the deduction of all operating expenses including depreciation & finance charges but before deduction of tax, dividends, subventions of group relief & other appropriations. When applicable it will include the share of profits & losses of associated companies. Items described by the company as exceptional are included. Extraordinary items are excluded. Retained Profit The change in shareholders funds from the previous year. Fixed Assets Property, plant, fixtures, office equipment & motor vehicles all at written down value. This will include leased & capitalised assets & for some industries assets held on a long-term basis & constantly replaced for renting or hiring out. Intangibles Will include items such as goodwill, trademarks, patents, & copyrights at their amortised book value. These are assets with no physical existence but deemed to confer benefits to the company in future periods. May include the value of brand names. Intermediate Assets Investments in subsidiary & associated companies, trade & other unquoted investments. Amounts due from other group companies, associated & affiliated companies that appear to be receivable over one year & with no stated fixed repayment terms. Other similar amounts due from third parties, such as directors & employees. Also insurance premiums of life policies & ACT recoverable. Long term portions of trade & sundry debtors & receivables will be included where they are disclosed in the accounts. Stocks Stock & work in progress. This includes land held for development. Cash or Equivalent Sundry & prepayment & accrued income due within one year where disclosed separately. Other assets held for realisation in next 12 months, amounts due from other group companies, associated & affiliated companies that appear to be receivable within one year. Cash & near cash assets such as tax reserve certificates, & other marketable investments. Total Current Assets The sum of stocks, debtors & cash or equivalent, representing the portion of the company's assets which is realisable within a year. Creditors Trade creditors & bills payable within one year. Short Term Borrowing Short term portion of Company's debt includes:- bank overdrafts & current portion of bank & other institutional loans, hire purchase & leasing obligations that appear to be payable within one year, also include acceptance credits. Current portion of amounts due to other group companies, associated & affiliated companies thatappear to fall due within one year.

2 Definition of Terms COMPANY ACCOUNTS (Continued) Other Current Liabilities Capital Gearing (Total Loan Capital + Short Term Borrowing) *100 Sundry creditors, accrued expenses & prepaid income, including (Total Capital Employed + Short Term Borrowing - Intangibles) dividends, corporation tax, social security & other sundry amounts payable within 12 months. Income Gearing Total Interest Charges * 100 (Total Capital Employed + Short Term Borrowing - Intangibles) Total Current Liabilities The sum of creditors, short term borrowing & other current liabilities. Total Assets Fixed assets + Intangible assets + Intermediate assets + Current assets Net Current Assets Total current assets less total current liabilities. Total Debt Total current liabilities + Total loan capital Shareholders Funds CHARTS This represents share capital & reserves including where relevant, share premium revaluation & capital reserves. Trading Stability Sales - Total Assets Sales Total Loan Capital Long term borrowings including director & group loans, group Profitability Profit before tax * 100 undertakings, debentures, bank loans, finance debt & loan stock. Total Assets The long term portion of trade & sundry creditors will be included where they are disclosed separately in the accounts. Working Capital Total Current Assets - Total Debt Total Current Liabilities Other Capital Employed This includes provision for liabilities & charges & minority interests in Gearing Sh. Funds - Total Loan Capital - Short Term Borrowing + Cash consolidated subsidiaries. Total Debt Total Capital Employed Immediate Liquidity Total Current Assets - Stocks - Short Term Borrowing Shareholders funds + total loan capital + other capital employed. Creditors Pretax Profit Margin % Pretax profit * 100 Plimsoll Chart Sum of the weighted versions of the above ratios. Sales Growth % (This periods sales - last periods sales)*100 Last periods sales Pretax Profit Growth % (Latest yr pretax profit - previous yr pretax profit)*100 Last periods sales Debtor Ratio Days Debtors * (no weeks * 7) Creditor Ratio Days Creditors * (no weeks * 7) Stock Turnover Sales 000/Employee Value Added 000/Employee Ave. Remun 000/Employee Stocks Value added Employee Remuneration Employee Remuneration Wages paid during the period not including directors fees where stated separately. Pre-tax / Owners Funds % Pre-tax Profit *100 Shareholders Funds Pre-tax / Total Assets % Pre-tax Profit *100 Total Assets

3 Plimsoll Model The objective of the Plimsoll Model is to guide the busy manager in his initial or casual assessment of a company. Most of us, as shareholders, employees, customers, suppliers, competitors or financiers, have an interest in a number of means of assessing these companies, we want to know of any significant change in their performance that would be relevant to our interest. The PLIMSOLL model seeks to alert us to important changes that will require our further attention. The model having done its job of alerting us, it is then important to involve professional accountancy help before acting on the results of the PLIMSOLL model. SALES GROWTH Boston Experience Theory and much else that has been written for managers in the last two decades, emphasises the importance of market share in the fortunes of a company. Many of the benefits of high market share are to do with economies of scale. A company is likely to be selling into a number of different markets, so an assessment of market share in any one market is not very meaningful. What can be readily assessed is the growth in its annual sales. A company financially healthy, but with declining sales, can be contrasted with one that is equally healthy, but as strong in sales growth, the latter being in a better position regarding its future health. Ultimately, success in the market place is basic to 1) SALES GROWTH 2) FINANCIAL HEALTH a viable company, so sales growth is given prominence in the PLIMSOLL charts. There this feature can be viewed in the context of The constraint that any third party is under in assessing a company financial health. is the data available about that company. The main source of reliable data about companies is that made available through the FINANCIAL HEALTH Companies Acts. This is the data used by the PLIMSOLL model. Many researchers have tried to identify those accountancy ratios or Other data is available about companies, particularly quoted groups of ratios that best predict failure in a company. Such work companies, with a view to informing the public, in the company's has been summarised by Green(1978). Wall and Dunning(1928) favour. This and recent press and analysts comment, is not combined groups of ratios using weights to produce what they included in the PLIMSOLL model, but can be used by you if the called an index of credit strength. Altman(1968) used a statistical model indicates something peculiar or of interest about a particular technique that discriminated between 2 groups of companies: a company. failed group and an on-going group of companies. Altman's model or Z-score on the basis of 5 ratios produces a single score which is Direct enquiry to a company will yield further data if required. No interpreted against a specific cut-off point to indicate whether a data is available for analysis of sole traders, partnerships and company is on going or likely to fail. Other which is interpreted unlimited companies. Small and medium sized companies, as against a specific cut-off point to indicate whether a company is on defined under the Companies Acts, only file partial data, which going or likely to fail. Other developments have tended to use or inhibits the analysis of such companies. These companies receive build on Altman's methodology to produce further predictive our enhanced analysis. This allows approximately 700,000 models for different industries or even different countries. companies to be analysed using the PLIMSOLL model. The main problems with these models are that they produce a The PLIMSOLL model uses graphical analysis to alert the users to single score, which is interpreted as on going or likely to fail. This its conclusions. Generally a line moving upwards is favourable and limits their usefulness. It does not provide guidance as to where the in one moving downwards the converse. The overall view given is weaknesses are occurring and the cut off point depends on the type balanced visually over 7 charts. The two charts put in the first and of company. Therefore companies would need to be rigorously last positions in the sequence of viewing on the page, are those for categorised into homogeneous groups before analysis - a difficult SALES GROWTH and the PLIMSOLL CHART, which indicate thing to do. Then the cut-off for that group of companies would have changes in financial health. The other 5 charts show in more detail to be established. All this tended towards complexity. where the changes in financial health are occurring. PLIMSOLL chose John Robertson's model because of the The principle of the PLIMSOLL model is that the character of a straightforward methodology that allowed some interpretation by the company is established over a period of time. Companies do not user as to where the strengths strengths and weaknesses of a normally fail or take off overnight but the seeds of their failure or company lay. After all, predicting failure is only one objective; success can be visible in their performance in their previous annual identifying success is very important and understanding a company results, sometimes spread over a number of years. No model is in financial terms is also important. perfect, and the PLIMSOLL model is fully defined for you in this text and is presented to you so that you can exercise your independent John Robertson's model was also found to work over a large judgement. number of companies, as providing an early warning of problems developing in companies, which often the managers of the said THE ORIGINS OF THE PLIMSOLL MODEL companies were either unaware of or turned a blind eye towards. The PLIMSOLL model originated in the necessity for managers in a Robertson's model, as used by PLIMSOLL, was developed using large UK industrial company to have a means of assessing the a systems approach, requiring a statement of "key elements" many companies with whom they traded. It is a product of identifiable in failed companies. This statement was produced Information Technology, with the new abilities to obtain data, using the literature, in particular the failure process described by analyse it and present the results of the analysis graphically. The Argenti (1976), and the detailed examination of 48 failed companies. Financial Health part of the model culminating in the PLIMSOLL chart is entirely based on the independent research work of John The key elements in failed companies are as follows: Robertson; Dip.ML; FCMA; FCCA. This research work has been published in `Management Accounting' from 1983 to The Trading Stability work resulted from the failure of the traditional accountancy ratios Most failing companies experience a fall in sales generated from an to indicate gross weaknesses in health of public and private limited asset base. This is true of the declining product cycle and the rapid companies. The PLIMSOLL model is about strength and expansion company, the latter indulging in continuous overtrading. weaknesses, in your own company and others, and its origins come from the need to better informed, earlier.

4 Plimsoll Model Declining Profits Profitability (Profit before tax / Total assets) The above conditions will alone erode the profit margins of a Again note that Total Assets are defined as in the Trading Stability company and when combined with other uncontrolled costs can Chart. This ratio is used rather than the more traditional ((Profit result in substantial losses. before tax + Interest) / (Total Assets - Current liabilities)). This is to avoid the anomalies associated with this last ratio, where increasing Declining Working Capital bank borrowings appear to increase profitability. This graph has a If not checked, declining profits will lead to a decline in working Y-axis covering the range -0.2 to The upper number is capital, accelerating if the company turns into a loss situation. equivalent to 30% return on Total Assets. If the graph is falling look Further reductions in working capital can be caused by continued either for a decline in sales relative to assets, or of trading margins expansion of fixed assets, especially when using short-term due to lower prices or higher costs. Also look for signs of borrowings to do so. increased borrowing in an attempt to expand rapidly or to cover past poor profitability. This can of course develop into a vicious Increase in borrowings downward spiral. The weighting factor used this time 3.0. Where Instead of tackling the problems of trading stability and profitability, pretax profits are not disclosed at Companies House, retained the failing company increases borrowings to maintain a level of profits are used. working capital. This has the double effect of reducing profits through additional interest payments and increasing the gearing of Working Capital ((Total current assets - total debt) / total current liabilities) a company at a time when it is inadvisable to do so. John The chart uses this ratio rather than the traditional: (Current Assets / Robertson then constructed a set of 5 ratios to highlight these Current Liabilities) ratio. This new ratio requires that long-term debt developments within a company. Weighting factors were used to is also deducted from Current Assets. It measures the ability of a normalise the ratios, so that they can be combined in a single company to pay its way without selling fixed assets. This graph has score. These 5 ratios are used individually as charts in the program a Y-axis covering the range -0.4 to If a company failing it does and the weighted combination of them is used in the PLIMSOLL not matter whether its debt is long or short-term. It is the total amount chart. of debt that matters. Failing companies have difficulty maintaining current assets, while total debt remains constant or even increases. THE CHARTS Hence the ability of the company to do business is impaired. The All the charts have fixed axes so that the visual impact of a weighting factor is 0.6. company's results is the same in all cases. Unfortunately this means that exceptional results either very high or very low can lie Gearing ((Shareholders funds - Total borrowings + Cash) / Total debt) outside the range of the Y-axis of a chart. This chart indicates how much of the company is "owned" by its shareholders relative to the providers of its borrowings. The term Sales Growth "highly geared" is in common use. As applied to this chart, a highly This is the percentage increase/decrease of sales over the geared company would have a line low on the Y-axis. The chart previous year The Y-axis of this chart is from -30% to +50%. This has a Y-axis covering the range from -0.5 to High gearing or a chart can be considered in relation to the overall growth of the low line on this chart means a high proportion of debt and therefore markets the company serves. Where total sales are not disclosed high risk. Failing companies experience a drop in equity, through a at Companies House, estimated sales are used. combination of losses in 'operations and reorganisation / extraordinary costs, as borrowings tend to increase. Should a PLIMSOLL chose John Robertson's model because of the company not borrow but instead obtain straightforward methodology that allowed some interpretation by the user as to where the strengths strengths and weaknesses of a Immediate Liquidity ((Liquid assets - Bank borrowing) / (Trade company lay. After all, predicting failure is only one objective; creditors + Other current liabilities)) identifying success is very important and understanding a company This chart shows the immediate cover for trade creditors. Banks in financial terms is also important. are the best-informed providers of credit to a company, and can impose conditions of preferential treatment for their loans. Trade Trading Stability creditors anxious to obtain sales are often ill informed about the Based on John Robertson's ratio: (Sales - Total Assets) /Sales) company and are also often unsecured creditors. This ratio shows Note that Total Assets are defined as Fixed Assets +Intangibles the cover for these creditors. The chart has a Y-axis covering the +Intermediates+ Total Current Assets. Note also that the range from -0.5 to Weighting factor is 0.3. construction of the ratio is designed to sharpen response to a change in trading stability. This is also true of the remaining ratios. Plimsoll Chart Where sales figures are not disclosed at Companies House, This chart is the weighted combination of the preceding five ratios. estimated sales are used. This graph has a Y-axis covering the The weights used are simply designed to balance the natural range -1.0 to A falling graph indicates sales falling relative to values of these ratios. The Y axis of this chart covers from -0.5 to assets and unless reversed this will cause problems for the In testing this combined ratio, Robertson found that a 30% fall company. Look for a decline in the market appeal of the main in this ratio for two years running indicated a serious deterioration in products of the company or conversely an over-ambitious a company's financial health. Unless drastic steps are taken to investment programme not being realised in extra sales. The rectify the deterioration it is unlikely that the company can survive. A weighting factor used when the trading stability ratio is included in survival plan needs to be imposed by the owners, a strong parent, the PLIMSOLL chart is 0.3. Where sales figures are not disclosed at the creditors or by a takeover. As in all of the charts, any fall in the Companies House, estimated sales are used. weighting factor PLIMSOLL chart should be investigated. used when the trading stability ratio is included in the PLIMSOLL chart is 0.3. Where sales figures are not disclosed at Companies House, estimated sales are used.

5 Disclosure Requirements // How To Use DISCLOSURE REQUIREMENTS HOW TO USE DEFINITIONS OF SMALL / MEDIUM AND FULL SIZE COMPANIES HOW TO USE THE PLIMSOLL ANALYSIS OF INDIVIDUAL COMPANIES Disclosure requirements vary for different types of companies. The table below lists the primary disclosure items for Public and Private 1) Look at the PLIMSOLL chart at the bottom right. This chart Limited Liability companies and Private Limited Liability companies gives a guideto financial health. If the line falls be alert. It is and the time limits within which they must be filed. unlikely that a company can survive a 30% or greater fall in this line for 2 years or more. This may not indicate imminent Item Public Company Private Company failure but reflects a drastic need for change in not indicate Time Limit Time Limit imminent failure but reflects a drastic need for change in the structure or finances of the company. Directors' reports 7 months after 10 months after and accounts. financial year end financial year end Look for U-turns or rising lines. If any of the charts are blank, look at the indicators ( «,» ) alongside the chart to see if Annual Return 42 days after annual 42 days after annual the line is above or below the chart respectively. Remember general meeting general meeting that small or medium sized companies do not have to file all the data required to complete all the charts. You can tell if Mortgage Register 21 days after creation 21 days after creation this is the case by the NA sign appearing in the data sections. of new mortgage of new mortgage 2) Look at the Sales Growth chart in the top right. Is the company Change of Director Within 14 days Within 14 days aggressively expanding and is this in keeping with its financial health? How is the company performing relative to similar companies? Availability of data may also vary from small and medium sized businesses since they are required to file only abbreviated accounts. 3) Look down the 5 centre charts to discover areas of strength and weakness in the company. Have they adequate Company definitions and filing requirements are summarised below. working capital? Have the owners a majority stake in the capital of the company? Small Companies Companies must satisfy at least two of the following three criteria:- 4) Scrutinise the data in detail to arrive at a satisfactory explanation for the movements on the charts. Look for:- i) Total Sales not exceeding 6.5 million ii) Balance Sheet Total* not exceeding 3.26 million Parent company if any iii) Number of Employees not exceeding 50 Accounting periods not equal to 12 months Month of year end Small companies are required to file an abbreviated balance sheet If the company's business is seasonal, how would its balance detailing assets. They do not have to file a profit & loss account sheet look at the peak of the season? (total sales figures will be omitted), nor do they have to file a Where would the company obtain extra finance required directors report or notes to the accounts. for its peak trading? Allowing for normal administrative delays, is the company Medium Sized Companies filing accounts late? Companies must satisfy at least two of the following three criteria:- How will recent political and economic changes influence this company? i) Total Sales not exceeding 25.9 million Have you anymore recent data or information to add to ii) Balance Sheet Total* not exceeding 12.9 million that provided by Plimsoll? iii) Number of Employees not exceeding 250 Use the checklist of non-financial indicators. Medium sized companies are required to file a profit & loss account, but they do not have to disclose a total sales figure. They must 5) Before acting on the Plimsoll analysis: however, file a directors report, balance sheet and notes to the Check all data from original accounts accounts. Check the calculations Consult your professional accountancy advisers. * balance sheet total = fixed assets + current assets