Business finance - acid test ratio big problem.
Discussion
Have to provide the acid test ration figure for a tender renewal (defined as Cash + Accounts Receivable +Short Term Investments OVER Current Liabilities). The ratio is really good, but IF you include the directors loan element then it drops below the required 1:1 ratio required, and that is a big problem for the pass/fail tick box!
Does anyone have any experience here as my accountant says that the directors loan should be excluded from the calculations 'as the loan is a subordinated debt. i.e. it will not be called upon at any time in the near future and more importantly ranks below all other debts of the company in the case of liquidation or bankruptcy' We also have £2m PI insurance to cover the client and this sum was only ever allocated as a DL for tax efficiency reasons knowing about the hike in dividend tax etc But it may yet sink the 'tick box' boat! I would hate this to disqualify us from a client we have worked with for 8 previous years! Arghhh - any experience/advice welcome! Cheers.
Does anyone have any experience here as my accountant says that the directors loan should be excluded from the calculations 'as the loan is a subordinated debt. i.e. it will not be called upon at any time in the near future and more importantly ranks below all other debts of the company in the case of liquidation or bankruptcy' We also have £2m PI insurance to cover the client and this sum was only ever allocated as a DL for tax efficiency reasons knowing about the hike in dividend tax etc But it may yet sink the 'tick box' boat! I would hate this to disqualify us from a client we have worked with for 8 previous years! Arghhh - any experience/advice welcome! Cheers.
Ken Figenus said:
Have to provide the acid test ration figure for a tender renewal (defined as Cash + Accounts Receivable +Short Term Investments OVER Current Liabilities). The ratio is really good, but IF you include the directors loan element then it drops below the required 1:1 ratio required, and that is a big problem for the pass/fail tick box!
Does anyone have any experience here as my accountant says that the directors loan should be excluded from the calculations 'as the loan is a subordinated debt. i.e. it will not be called upon at any time in the near future and more importantly ranks below all other debts of the company in the case of liquidation or bankruptcy' We also have £2m PI insurance to cover the client and this sum was only ever allocated as a DL for tax efficiency reasons knowing about the hike in dividend tax etc But it may yet sink the 'tick box' boat! I would hate this to disqualify us from a client we have worked with for 8 previous years! Arghhh - any experience/advice welcome! Cheers.
In manufacturing we do the Acid Test ratio slightly differently - (Current Assets Minus Stocks) / Current Liabilities. You would always be looking for above 1:1 though it really does depend on your industry.Does anyone have any experience here as my accountant says that the directors loan should be excluded from the calculations 'as the loan is a subordinated debt. i.e. it will not be called upon at any time in the near future and more importantly ranks below all other debts of the company in the case of liquidation or bankruptcy' We also have £2m PI insurance to cover the client and this sum was only ever allocated as a DL for tax efficiency reasons knowing about the hike in dividend tax etc But it may yet sink the 'tick box' boat! I would hate this to disqualify us from a client we have worked with for 8 previous years! Arghhh - any experience/advice welcome! Cheers.
As for your situation, I was with an Accountant a few weeks ago and he was talking about putting a Directors Loan from another Company I know into Long Term Liabilities, thereby removing it from your equation. He did NOT say that this could definitely be achieved but it certainly is something you should be asking.
We hadn't mate and we had a v healthy ratio but they stuck it in themselves by working from our year end accounts. They have accepted that it was not appropriate to do that with a subordinated loan created for tax efficiency reasons only so its all sorted now 
DL will be very useful to draw against this year given the new higher dividend taxation Phew mind!!!
DL will be very useful to draw against this year given the new higher dividend taxation
Phew mind!!!Gassing Station | Finance | Top of Page | What's New | My Stuff