A contractor we assessed this month made a net margin of 8.4% in its last disclosed year, above the indicative band for its sector. Its cash cover at the same year end was 0.04 times. The two facts sit on the same balance sheet, and only one of them is what a credit scorer weighs.
The ratio
Cash cover is cash at bank divided by creditors due within one year. If you hold £30k and owe £841k inside twelve months, your cover is 0.04 times. Liquidity measures of this kind are part of the standard financial standing assessments public-sector buyers run, and they are computed on the year-end position, however unrepresentative that day was.
Below one times means the business depends on collecting debtors to pay its bills. Few trading companies hold cash equal to everything due, so scorers use sector bands rather than the raw reference. The report classes each year against an indicative range for the sector, from fully covered down to cash-constrained. The range is ours, printed in the report, not an industry standard.
Why profit does not protect you
The contractor in question had grown turnover from £2.96m to £3.32m. Profit was real. But cash fell from £473k to £30k over two years while trade debtors rose from £377k to £975k. Profit was being converted into receivables, not bank balance. The scorer does not see the receivables as money. It sees the cash.
Three things usually sit behind a pattern like this:
- Retentions and work in progress that have not been invoiced, which are assets on paper and nothing at the bank.
- A dividend taken in a good year, which is fine in itself and reads badly when the following year is tight.
- Growth in contract size without growth in the facility that funds it, so the business starts funding its customers.
In this case a charge in favour of an invoice finance provider was registered as the cash fell. A charge of that kind is consistent with a business borrowing against its receivables, and it is on the public charges register for anyone to read.
What to do about it
The year-end position can be shaped. Not by anything improper, but by knowing the date matters and planning for it: chasing the two largest debtors in the final month, timing a dividend for the month after year end rather than the month before, invoicing work in progress that is ready to invoice. A finance director who knows the number is being scored will manage the number.
The other half is explaining the last one before you are asked. A cash bridge, showing which balance sheet line absorbed the cash between one year end and the next, turns a question in a PQQ into a paragraph in your response.
Cash cover is one of thirty-one charts in a company assessment. The rule that flags it, and the threshold it fires at, is printed in the report.
Sources
- The figures are from the anonymised worked example described on the method page: one contractor’s filed accounts, FY2016 to FY2025.
- Standard financial ratios in public-sector financial standing assessments: Cabinet Office, Assessing and Monitoring the Economic and Financial Standing of Bidders and Suppliers, May 2021.
- Charges register: Companies House.
- How findings are tested: our approach.