Courtesy of R Lott of WDCS

understanding the Free Asset Ratio

Financial assessment is based upon the latest set of audited or certified accounts. If there are material post balance sheet changes these will also be taken into account. For applicants yet to commence trading or within their first year of trading, it will be based upon a certified opening balance sheet. The main financial assessment consists of a free assets ratio test where the free assets of the company should equate to 5% of the projected total turnover for the coming bond year. Turnover is considered to be the total turnover of the company and not just that covered under the ABTOT bond. This is not an inflexible rule, but a goal that we hope members will be close to meeting or already achieving and will continue to do so as they grow in the future through retained profits.

Free assets are considered to be the total of net assets shown in the balance sheet less deductions made for assets which are not considered to be recoverable, cannot or will not be repaid in the short term and fixed assets which are not capable of supporting borrowing. We may ask for a detailed breakdown of other debtors and prepayments to be provided. Examples of deductible assets include:

Intangible assets such as goodwill, capitalised research and development costs and capitalised website costs.
Fixed assets such as computers and office equipment that cannot support borrowing
Brochure and prepaid advertising costs
Loans to or amounts due from associated companies, directors, or employees which will not be repaid within the short term
Any assets which are used as security for bonds

Example:

Projected total turnover for the next bond year = £1,000,000.
5% free assets required for a turnover of £1,000,000 = £50,000.
Balance sheet net assets = £120,000 - goodwill £40,000, prepaid advertising costs £15,000 and a loan to a director £2,000 = £63,000.
Free assets = £63,000 which is more than the 5% required.

On occasions where the free assets test cannot be met, ABTOT may require a new cash injection to be made into the company with an undertaking that it will not be repaid in full or part without our prior consent. Alternatively, if loans have already been made by the directors to the company, we would not request further new cash be injected but instead only request that either all or part of the existing loans are not repaid depending upon the level of the deficit. At future renewals of membership, the financial assessment will continue to be conducted based on the latest audited accounts at that time. The renewal date of the membership will normally be within six to eight months of the last accounting year end to ensure that the accounts available represent a recent trading period.

Where the applicant forms part of a larger group, we will normally request the consolidated accounts for the ultimate holding company and conduct the financial assessment at that level. In situations where associated companies exist through common ownership of the directors, we may ask for certain undertakings that trading is conducted on an arms length basis and that no loans, guarantees or letters of support are provided by the applicant in favour of these associated companies.

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