Wednesday, 21 September 2011

Estimating Turnover

Companies House states that companies of a certain turnover, balance sheet and employee size do not have to file full accounts. So, is there a way of finding out the turnover of a small or medium sized companies?

You can certainly get there with a best estimate and by applying a bit of common sense. However, there are some factors that you may want to consider:

· Betting shops and consultants have very few trade debtors

· Seasonal businesses will have debt and stock peaks and troughs

· High end retailers (e.g. jewellers) will have a high stock value

· Supermarkets tend to have high stock, low trade debtors, and small profit margins

The trick is to compare apples with apples and apply the same rules for all the companies you’re looking at. This way, you’ll get a feel for where one company is in relation to another. Of course, a company with assets of £50,000 is likely to have a higher turnover than one with £5,000 of assets. Outward physical observations about a company (e.g. staff numbers, premises, cars, advertising) are social factors that can give an indication of where a company is in terms of the perimeters you establish.

There are three key areas that you can look at to start building an estimated turnover figure:

1. Total Assets

2. Trade Debtors

3. Stock

The roughest of estimates starts with Total Assets. Having looked at many abbreviated accounts, and having the advantage of knowing what the turnover of a company is, asset values x 3 or 4 seems to be about right.

Trade debtors pay every 70 to 90 days, which is the equivalent to 4 or 5 times per year. Therefore, multiplying the Trade Debt by 4 or 5 gives you an indication of gross sales or turnover.

Stock has to be sold, so you have to decide of a reasonable inventory turnaround based on the nature of the goods and services being sold. If it’s 60 days, then you know that the stock is turned 6 times a year. Multiply the stock value by 6 to get another indication of turnover.

Whilst it’s not ideal in terms of getting an exact figure, it is a great way of seeing how companies rank against each other. And whilst people are always keen to rank by turnover, other available measure can be a better indication as to the health and profitability of a business. Cash at Bank, is a personal favourite of mine. If that’s showing a steady increase, chances are their sales are increasing and their spending is controlled.

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