Estimating Turnover

Your Competitor’s Turnover… how to calculate it

Filing abbreviated accounts at Companies House means people don’t know what your Turnover is… or do they?

Old accounting lags like me and credit agencies have their own ways to estimate a company’s Turnover from just a Balance Sheet… here are a few… and they can be surprisingly accurate

Estimating Turnover from Debtor Days

Debtor Days is an accounting ratio that can be used to figure out a competitor’s Turnover…

Work out your own Debtor Days… and apply it to your competitor’s Debtors… et voila you have a good estimate of their Turnover if their business is similar to yours

Apply your industry standard* Debtor Days to their Debtors and you’ll get yet another estimate of their Turnover

Take care though… dig around in the notes to the accounts and try to use only Trade Debtors in the calculations

And for any of you GS10k guys I have a spreadsheet that does it for you I’ll send you if you drop me an email…

Times by Six

One of the world’s largest credit agencies simply takes a company’s Debtors and multiplies that figure by 6 to estimate Turnover…

The logic is that globally Debtors take roughly 60 days or 2 months to pay… and there are 6 lots of 2 months in a year

mmmm… sophisticated or what?

And the Rest

Lots of Credit Agencies have a go at estimating a company’s Turnover using their own weird ways… and some even let you know what that estimate is (eg FAME database let you turn on a tab to show a company’s estimated Turnover)

The Takeaway

Just because you don’t file your Turnover doesn’t mean people can’t and aren’t guessing what it is… and they’ll typically underestimate… because they’re cautious finance guys…

 

*industry standard Debtor Days can often be found in a Credit Agency report

EBITDA

EBITDA what it is, where to find it in your accounts and why it matters..

Definition of a profession ? A group of people who come up with terms only they understand… EBITDA proves accountants are true professionals…

An acronym, containing weird terms, representing a number that the finance community heavily leans on but isn’t readily available in a set of accounts that accountants prepare…

… truly professional…

Earnings Before Interest Tax Depreciation & Amortisation

There’s a video below below showing you how & where to find it in a set of accounts… but first I’d like to explain why EBITDA is so important…

The finance community use it to compare your performance over time and with others…

… that’s it…

And to do that they need as clean a sense of your profits (earnings) as they can get…

So… they want a profit figure Before :

Interest

Because Interest is a function of capital structure… (some companies have debt, some don’t)… to compare performance between companies we want a profit figure that ignores a company’s capital structure…

Tax

Tax regimes around the world (and even within industrial sectors) can be / are different… so to compare performance between companies we want a profit figure that ignores Tax

OPERATING PROFIT

Ignoring Interest & Tax gives us your EBIT (Earnings Before Interest & Tax)… in a UK set of accounts you’ll find EBIT as Operating Profit in the Profit and Loss

Depreciation

Finding EBIT is easy… but now we have to dig around the accounts to find the ‘Depreciation charge for the year’ and add that back to the Operating Profit…

Why ? Because Depreciation is a book-keeping entry based on a policy decided by the company’s directors… one company might depreciate its assets (say vans) at 25%… another at 33%… which can affect profit dramatically

To compare performance between companies we want to ignore such a moveable / arbitrary / manipulable number

Amortisation

Fancy, old fashioned (but truly professional) word for Depreciation of an Intangible Asset (such as Goodwill)… and as with Depreciation it needs to be added back if we want to compare company performance

EBITDA… There you have it

A universally used metric to measure performance… that you can’t find…

… you have to work it out… by :

  1. finding Operating Profit (from your P&L)
  2. adding back Depreciation & Amortisation (which you’ll find in the notes to your accounts… it’s the ‘charge for the year’ in the Fixed Asset (Non-Current Asset) table

 

 

 

 

DSCR what it is and why it matters

DSCR is the Debt Service Cover Ratio required by bankers… typically when they are ‘cash’ lending for an MBO, acquisition etc

They want to make sure a company’s annual Cash Flow can cover its annual Debt repayments… and they add a little bit on for comfort

So… let’s play numbers

If a company has £100k Debt repayments (including interest)

And their Bankers apply a DSCR of 1.3

Then the company must have CFADS (Cash Flow Available for Debt Service) of £130k to keep their Bankers happy

In the Real World

The calculation is done the other way round… so

Say our company has CFADS of £500k

And their Banker’s DSCR of 1.25

Then the company has a Debt repayment capacity of £400k

The Bank will then deduct any existing Debt repayments (Funding Circle loan, HP payments) … say e.g. of £100k

The Bank now thinks the company can cope with an extra £300k of Debt repayment each year…

For an MBO they may typically lend over 3 to 4 years… meaning our company can borrow an extra £900k to £1.2m

CFADS

Obviously DSCR is just about symbiotically linked to CFADS… so check out the post and video on CFADS here

 

CFADS how to calculate it and why it matters… and it does

CFADS is a measure of a company’s Cash Flow Available for Debt Servicing… and it matters because Bankers like it… so if you’re looking at an MBO or going on an acquisition spree chances are your bankers will look at your CFADS to see if they want to come along…

Calculating your CFADS… and how much they’ll lend you

Here’s a video working through the nuts and bolts of calculating your CFADS & what a bank’ll lend… and if you want a spreadsheet to help you out drop me a line at pete@pete-wild.co.uk

Essentially Banks :

1.Caluclate your CFADS

2.Adjust for their required DSCR (Debts Service Cover Ratio)

3.Deduct any existing Debt repayments you’re making

4.Multiply the result by 3 or 4

And that tells them what they can afford to lend based on the company’s ability to generate enough cash to pay them back

In the Real World

What if your CFADS won’t get you the cash you need?

All may not be lost if your CFADS doesn’t quite support the money you’re looking to borrow…

… in the real world the banks are often trying to work to a figure you need them to hit because that’s the number you’ve agreed for the MBO or acquisition…

… so your Banker may well work with you to help get the CFADS figure to where it needs to be (see the video above) … hey… your Banker has a target to hit, bonus to earn, and he knows that if he says no you’ll be off somewhere else…

… and bankers hate losing clients