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  • Accounting Principles and Procedures Part 4

    Credit checks and financial analysis are essential tools for evaluating a supplier or client’s ability to pay and finance a project, particularly in the construction industry.

    According to Experian, a leading credit reporting agency, conducting thorough credit checks can help prevent financial losses and minimize the risk of non-payment (Experian, n.d.).

    These red flags can indicate a company’s poor credit control, which may result in difficulties in getting paid or completing the project.

    For instance, multiple credit checks, nil assets, or CCJs against the company should raise concerns (Experian, n.d.).

    Fortunately, most credit check portals provide comprehensive information, making it easier to identify these issues (Experian, n.d.).

    If you’re unable to access this information, you can calculate a liquidity ratio to assess a company’s financial stability (DeFrang, 2019).

    Conducting credit checks on clients can help you avoid the financial risks associated with non-payment or unfulfilled projects.

    For example, in the construction industry, companies may go bankrupt or fail to pay their suppliers, leaving you with outstanding debts (Baker, 2018).

    Land surveying clients with poor credit control may also compromise on the quality of their work, insurance, or professionalism.

    To mitigate these risks, it’s crucial to investigate a company’s credit history and assess its ability to pay for your services (Baker, 2018).

    Furthermore, evaluating a company’s liquidity using a liquidity ratio can help you determine its ability to support a project of a given size and duration.

    For instance, if a survey estimated to cost £50,000 is expected to take several months to complete, a company with a limited working capital base of £20,000 per month may struggle to cover its expenses and potentially go insolvency (DeFrang, 2019).

    To avoid such risks, it’s advisable to scrutinize potential clients’ financial stability before engaging your services.

    References

    • Accounting Principles and Procedures Part 3

      Acid Test Ratio The Acid Test Ratio, also known as the Quick Ratio, measures a company’s ability to pay its short-term debts using its liquid assets. According to a study by Forbes, a company with a higher Acid Test Ratio has a higher likelihood of being able to pay its debts, which can lead to improved financial stability. This ratio is calculated by adding a company’s cash, accounts receivable, and short-term investments, then dividing that total by its current liabilities. By analyzing this ratio, investors can gain insight into a company’s ability to meet its short-term obligations.

      Profitability Ratios Profitability Ratios are a measure of a company’s ability to generate earnings from its sales. A well-calculated Profitability Ratio can help investors determine a company’s financial health and potential for future growth. A study by Harvard Business Review found that companies with high Profitability Ratios tend to outperform their peers in terms of long-term financial performance. The margin is calculated using the formula: profit ratio = turnover – (cost of sales/turnover). This ratio provides valuable insight into a company’s ability to manage its costs and generate profits.

      References

      • Accounting Principles and Procedures Part 2

        References

        • Accounting Principles and Procedures Part 1

          Material: £50+vat

          Material costs account for a significant portion of the total invoice, with the current figure standing at £50+vat.

          Total invoice: £150+vat (£180)

          The total invoice, including VAT, totals £180. It’s essential to note that the VAT rate may vary depending on the specific services or goods being purchased.

          Total paid to Subcontractor: £160.00

          The subcontractor’s invoice, which includes both labour and plant elements, totals £160.00.

          Total paid to HMRC by the Contractor: £30.00

          The contractor has paid £30.00 to HMRC, which is the amount of VAT due on the total invoice.

          You can play around with the spreadsheet.

          Refer to the Construction Industry Scheme (CIS) for more information on tax deductions.

          CIS deductions can include any expense that is essential to the business, such as equipment purchases or software licenses.

          References

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