Guidance

DfE's approach to assessing the financial health of organisations

Updated 7 October 2025

Applies to England

Summary    

This guidance sets out the Department for Education’s (DfE’s) approach to assessing financial health of organisations. It does not replace any submission requirements or guidance for any register, procurement, or invitation to tender (ITT) rounds.

For a complete picture of financial health requirements, this guidance should be read alongside the Financial handbook for independent training providers.

The term ‘organisation’ is used within this guidance to refer to all entities and is used as a generic term. Organisations are defined for the purpose of this guidance as:

• independent training providers (ITPs)
• special post-16 institutions (SPIs)
• non-maintained special schools (NMSS)
• organisations applying to a register, procurement or ITT rounds, which references this document

This guidance is not to be used for:

• general further education (FE) colleges
• sixth form colleges
• academies or academy trusts

If you are seeking financial guidance for these areas, please follow the links below:

• academies financial returns
• college financial planning handbook
• college accounts directions

Readers of this guidance are expected to include individuals who are responsible for an organisation’s financial performance, along with those who are responsible for submitting financial information to DfE.

It is the organisation’s responsibility to ensure that all account and financial returns are submitted in accordance with DfE requirements.

DfE uses financial health as a measure of an organisation’s financial status, in terms of its:

• financial performance
• ability to meet ongoing financial commitments

It helps us to understand the degree of risk in contracting with organisations, either directly or indirectly. We assess financial health, primarily through the review of organisations’ annual accounts, assigning a financial health grade. The financial health grade is used to establish the maximum recommended value of contracts appropriate to the financial resources of organisations that have a direct contract.

This guidance explains DfE’s approach to financial health assessments and the information that must be submitted to DfE for those assessments. If an organisation is applying to a register, procurement or ITT round, these will specify their own financial requirements or limitations above and beyond this guidance. It is the responsibility of an organisation to submit correct financial information in applications and to seek clarity on any specific requirements it is unsure of before application.

Register, procurement and ITT rounds may refer and link to this document. These rounds may also combine this document with specific application requirements or guidance relating to financial submissions.

What has changed in this edition

The main changes compared with the September 2024 edition are:

• references to the Education and Skills Funding Agency (ESFA) replaced with DfE, following the transfer of ESFA functions to DfE from 1 April 2025
• additional guidance and explanation on items that we class as borrowings and debt, including ‘other creditors’ requirements under borrowings and debt (paragraphs 1.12, 2.5, 2.7, 2.8, Annex B and Annex D)
• moderation criteria have been placed in subsets depending on their impact to the financial health grade (paragraph 2.13)
• updates to moderation criteria definitions and scope, including dividends and the use of a guarantee (paragraphs 2.13 (k) and 2.13 (l))
• updated wording in the moderation section from ‘may’ to ‘will’, if financial statements are not submitted to us within specified timescales and in line with the Financial Handbook for ITPs (paragraph 2.13 (e))
• any positive moderation applied to an inadequate grade will move to a grade of no more than satisfactory (paragraph 2.13)
• expansion of financial information collected as part of the assessment process, with additional explanations on how to locate the financial information within your financial statements (Annex D)
• additional guidance on the submission of financial statements and what is required (paragraphs 1.2, 1.5, 1.12 and 1.20)
• increase for new organisations’ minimum actual trading activity from 3 to 6 months (paragraph 1.19)

Part 1: Submission requirements

Checklist

1.1: This section is designed to assist an organisation in supplying the full and correct information required by DfE to complete the financial health assessment of the organisation. If an organisation fails to supply all the correct information, it could adversely impact their financial health score and grading. Further details on what should be contained within an organisation’s financial information is supplied later within this guidance.

1.2: You must submit:

• full, signed final financial statements for your organisation as soon as they are available (abbreviated, abridged, filleted or micro-entity accounts are not acceptable) – see paragraphs 1.12 to 1.17 for further details
• a breakdown of all creditors to enable DfE to identify all borrowings – this includes a further breakdown of other creditors (this will be a line titled ‘other creditors’ or ‘other payables’ within the organisation’s creditors notes, if shown within your financial statements) – see paragraphs 1.12 to 1.16, 2.5 to 2.8 and Annex B for further details
• if your organisation is part of a group, the full, signed final financial statements for your organisation’s ultimate UK parent company (abbreviated, abridged, filleted or micro-entity accounts are not acceptable) – see paragraphs 1.26 to 1.29 for further details

1.3: If an organisation submits amended financial statements to Companies House after their original statements have been shared with DfE, they must also submit the amended financial statements to us as soon as they become available.

1.4: The organisation must ensure that the information recorded within the financial statements being submitted to DfE match that which is recorded on Companies House. Where an organisation has only submitted abbreviated accounts to Companies House, DfE still requires full accounts as detailed in this document. DfE will verify content contained within the 2 documents for consistency. If there are discrepancies this may adversely affect the organisation’s financial health grade.

1.5: No alternative to the required information will be accepted. No additional information provided above and beyond the required information will be accepted or viewed unless it has been separately and specifically requested.

Submission of financial statements

1.6: The submission route for financial statements using the Customer help portal applies only to ITPs with a direct contract with us. Financial statements should be submitted through the Customer help portal, using the ‘Contact a Case Manager’ option. This will require a DfE Sign-in account to login. Organisations applying to any register, procurement and ITT round must follow the guidance and submission routes detailed within the relevant application process.

1.7: The assessment team will work with DfE’s Independent Market Oversight Division (IMOD) and Place Based Teams in receiving the financial statements, and any other relevant financial information for organisations with existing contracts, as required by DfE.

1.8: Financial health for organisations is graded based on financial ratios taken from the latest available, and where applicable, published financial statements. Every organisation must submit this information to DfE, in accordance with its contract, or its application to a register, procurement or ITT round. For organisations that hold a contract with the DfE, the latest financial statements must be sent to DfE as soon as they become available.

1.9: Organisations with a current funding agreement or contract for services must submit financial statements each year. They must do this as soon as the statements are finalised and signed and before they are overdue for filing at Companies House or the Charity Commission. In addition, organisations must refer to Part 4 of the Financial handbook for independent training providers for the time to submit their financial statements.

1.10: Failure to submit financial statements on a timely basis, or when requested, will result in the award of a financial health grade of ‘Inadequate’ until financial statements are submitted and assessed, and may result in termination of the organisation’s contract(s) with DfE.

1.11: If DfE identifies that financial statements have been filed at Companies House or the Charity Commission and have not been submitted to us, we reserve the right to award an ‘Inadequate’ grade.

1.12: Financial statements submitted must be full accounts (DfE does not accept abbreviated, abridged, filleted or micro entity accounts as complete submission and if these are received they will result in an ‘Inadequate’ grade), audited, where appropriate, and required by Company law, or as required within the Financial handbook for independent training providers.

DfE will not accept extracts of financial statements or selected pages. If your organisation is a company and only abbreviated accounts are required for Companies House filing, you must still submit your full statutory accounts (in the format required by the Companies Act 2006 and relevant reporting requirements) to DfE, which must include, as a minimum, the following elements:

• profit and loss account, or equivalent, for the period
• an end of period balance sheet
• detailed commentary and breakdown, including all notes to the accounts
• a breakdown of amounts contained within ‘creditors’ and ‘other creditors’ (‘other creditors’ is determined here as any item recorded within either current or long-term liabilities that is not identifiable in its own right – it will be referred to within the financial statements as ‘other creditors’ or ‘other payables’)
• fully signed directors, trustees, auditors and accountants reports, as appropriate

1.13: For DfE assessment purposes, ‘other creditors’ is not an acceptable account classification, and it must be further explained. If your organisation does not submit a breakdown of ‘creditors’ and ‘other creditors’ and DfE is unable to identify borrowings from your financial statements, we will record all amounts within your ‘creditors’ and ‘other creditors’ as borrowings.

1.14: If you submit a breakdown of creditors and this contains a line for ‘other creditors’, we will include all ‘other creditors’ as borrowings unless you submit a full breakdown.

1.15: We will also treat all ‘amounts owed to group undertakings’ as borrowings unless the financial statements detail this as trading activity or other non-borrowing activity.

1.16: Failure to supply a full breakdown may impact your organisation’s grade and could result in being awarded an ‘Inadequate’ financial health grade.

1.17: If your organisation is not required to produce statutory financial statements due to its legal form, you must submit accounts in a format like that prescribed for companies’ annual accounts. These must include, as a minimum, the elements as prescribed in paragraph 1.13 to 1.17.

1.18: DfE reserve the right to use or rely upon external sources of information to inform our decision on your finances, such as Companies House, the Charity Commission or credit reference agencies, along with information from sites that monitor these. This may not apply during register, procurement and ITT rounds, where the specific requirements of those rounds override this guidance.

New organisations: submission of financial information

1.19: If your organisation is unable to supply statutory financial statements because it has not traded for a sufficient period, you must supply management accounts to date, showing actual activity, along with forecast figures for a remaining period. The combined information must cover a period no less than one year, with the management accounts comprising at least 6 months of actual trading activity.

Actively trading is determined here as including income and expenditure arising as a result of trading activity and does not include the incurrence of set up or start-up costs. The financial information you submit must clearly distinguish between actual trading activity and forecast activity. As a minimum, the financial information must consist of:

• a profit and loss account covering a minimum 12-month period, from the commencement of trading
• an end of period forecast balance sheet
• a minimum 12-month rolling cash flow statement covering the same period as the profit and loss account and the balance sheet
• detailed narrative supporting assumptions made for both management accounts and forecast information

1.20: If the actual trading activity cannot be identified, this may result in an ‘Inadequate’ grade being awarded.

1.21: It is not permitted for management accounts to be submitted instead of full financial statements, where financial statements have been produced. If management accounts are submitted alongside financial statements, the management accounts will not be reviewed unless they have been specifically requested by DfE.

1.22: Any financial health grade awarded based on the submission of management accounts and financial forecasts will only remain valid until the first set of financial statements are finalised and signed. If we do not receive full financial statements as soon as they become available, this may result in the financial health grade being moderated to ‘Inadequate’.

1.23: DfE will assess management accounts and financial forecasts on an individual basis. We will take into consideration their achievability, potential for delivery against the information submitted and any autoscore recorded. We will only grade management accounts and financial forecasts a maximum grade of ‘Satisfactory’.

1.24: If any of the required information is missing, we will grade financial health as ‘Inadequate’ due to insufficient information available for assessment.

Parent organisations

1.25: A parent organisation’s financial statements cannot be used as a replacement for the contractor’s financial statements and are not subject to the full assessment process. The financial health of any parent organisation, regardless of where it is in the world, will not serve to improve the grade of a prime organisation or applicant to a register or procurement round. The ultimate UK parent organisation’s financial statements are requested to assess whether the parent or group may adversely impact the financial stability of the prime organisation that DfE contracts with.

1.26: If your organisation is part of a wider group of organisations or companies, classed as a subsidiary, or has another organisation as a significant controlling party in your organisation, you must submit full financial statements for the ultimate UK parent organisation or company. You must also submit those of the contracting or applying organisation. If you are in any doubt regarding whether your organisation is a parent organisation or company or a subsidiary organisation you should refer to either the Companies Act 2006 which defines, at sections 1159, 1162 and relevant schedules, what constitutes a holding company, a parent company, and a subsidiary organisation, or the relevant accounting standard applicable to your organisation – FRS 102 Section 9, Consolidated and Separate Financial Statements, or the Charities SORP (FRS 102), sections 24 and 26, or IFRS 10, Consolidated Financial Statements.

1.27: If an organisation fails to submit its ultimate UK parent organisation or company financial statements, this may result in the award of an ‘Inadequate’  grade.

1.28: If your ultimate UK parent organisation does not produce consolidated financial statements, you are required to supply the financial statements for all non-dormant subsidiaries, in addition to the financial statements of your ultimate UK parent organisation.

1.29: If your ultimate parent organisation or company is registered outside of the UK, you must supply the full financial statements for your ultimate UK parent organisation or company where you have one. We do not require financial statements of non-UK based parent organisation.

Exemptions

1.30: The following organisations are exempt from this financial health assessment process, and do not need to submit annual financial statements to DfE:

• central government departments, executive agencies, or non-departmental public bodies
• local authorities, including local education authority (LEA) schools
• free schools
• NHS trusts, fire authorities and police authorities, including Police and Crime Commissioners
• Higher Educational Institutions financially monitored by the Office for Students
• rail franchise operators, licensed and acting on behalf of the Department for Transport

1.31: While there are exemptions and exclusion from this guidance, there may still be a requirement for any organisation to submit accounts for register, procurement, or ITT application purposes.

Exemptions: large organisations

1.32: DfE may also consider established public limited companies, other registered companies, charities, and voluntary organisations to be exempt from this financial health assessment process, if they have a consistent annual turnover more than £75 million, where total current DfE funding to the organisation constitutes, or is expected to constitute, less than 5% of the organisation’s annual turnover.

1.33: DfE will undertake a financial health assessment when first considering whether an exemption applies.

1.34: Financial statements for organisations under this category will be reviewed annually to ensure:

• the organisation remains financially stable
• that total DfE funding is incidental to their business (that it is no more than, or expected to be no more than, 5% of annual turnover)

1.35: As part of this annual review, DfE will access publicly available financial statements and, in addition, may also request financial information from you. We will also confirm organisational status and that no change has occurred which could affect the organisations status or stability.

1.36: DfE may use external sources of information to inform our decision on your finances. If we become aware of any financial risk to an organisation, we reserve the right to review the exemption status at our discretion.

1.37: An organisation may be removed from this category and be subject to the full assessment process if either:

• total DfE funding becomes material, that is, exceeds 5% of annual turnover
• annual turnover reduces to below £75 million
• we become aware of concerns over the financial health of the organisation

1.38: Organisations which are considered to fall under this category must still submit their financial statements as part of a register, procurement or ITT round for validation or assessment purposes or when requested by DfE.

1.39: DfE reserve the right to remove the exemption category for large organisations or adjust the turnover threshold at any time.

Part 2: Assessing financial health

Financial health scoring and grading

2.1: Financial health for organisations is assessed and graded, based on the following 3 financial elements.

Profitability (sustainability)

2.2: We assess profitability based on profit after tax (for continuing and discontinued operations), plus depreciation and amortisation charge for year, less dividends, as a percentage of turnover.

Solvency (current ratio)

2.3: We assess solvency using the current ratio, this being the ratio between current assets and current liabilities.

Gearing (debt ratio)

2.4: We assess gearing based on debt as a percentage of reserves and debt.

2.5: Debt is defined as all long-term and short-term borrowings, which includes but is not limited to:

• bank loans and overdrafts
• other loans
• finance leases and hire purchase contracts
• credit cards
• ‘inter-company’ and group loans to the organisation
• personal loans to the organisation
• amounts owed to directors (including directors’ loans, directors’ current accounts and any other amounts owed to directors)

2.6: DfE will also include as debt, amounts owed to group undertakings, unless it is stated as trading activity or other non-debt related activity. This will be identifiable from the creditors notes to the accounts.

2.7: DfE will include the full amount of ‘creditors’ and ‘other creditors’ within the debt figure if we are unable to identify the amount of borrowings contained within this figure. A breakdown of ‘creditors’ and ‘other creditors’ must be supplied alongside the submission of the organisation’s financial statements.

2.8: ‘Other creditors’ should be shown as a single line within the organisation’s creditors notes and may also be referred to as ‘other payables’, if applicable to your organisation. ‘Other creditors’ is not an acceptable account classification for the purposes of the financial health assessment, as it can contain multiple categories which may or may not include borrowings and debt. Therefore, a breakdown of this amount is required to ensure we can correctly identify borrowings and debt.

2.9: For the purposes of the financial health assessment, reserves are defined as shareholders’ funds less intangible assets. If this is a negative figure, an automatic score of 0 is given.

Financial health grade and scoring system

2.10: Each of the financial health grade elements is given a score out of 100, using the scoring system set out in Annex C.

2.11: DfE makes an initial assessment of the financial health grade by comparing the aggregated points score with the assessment criteria set out below. This assessment may then be subject to moderation.

Grade	Points
Outstanding	240 to 300 points
Good	180 to 230 points
Satisfactory	120 to 170 points
Inadequate	<= 110 points

2.12: Definitions of financial health grades and their financial indicators are included at Annex A.

Moderation

2.13: DfE reserves the right to moderate any initial grade either up or down. We consider each moderation on a case-by-case basis. We will only consider one moderation criteria for each assessment and will not combine multiple moderation criteria. Any moderation upwards will be to a maximum grade of ‘Satisfactory’. Moderation criteria may include, but are not limited to, the following:

Moderation criteria that can move a grade to ‘Inadequate’

(a): We may moderate to ‘Inadequate’ where auditors have given the financial statements a qualified or adverse opinion or provided an ‘emphasis of matter’ or ‘material uncertainty’ statement.

(b): We will grade financial health as ‘Inadequate’ if Companies House shows your organisation has entered administration, liquidation, insolvency, a Company Voluntary Arrangement, or is shown as dormant.

(c): We will grade financial health as ‘Inadequate’ if financial statements are overdue for filing at Companies House or the Charity Commission.

(d): We will grade financial health as ‘Inadequate’ if organisations do not submit the most recently filed full financial statements to us when they are finalised and signed.

(e): We will grade financial health as ‘Inadequate’ if organisations do not submit their full financial statements, for accounting periods commencing on or after 1 August 2024, to DfE in line with the relevant filing deadline set out in the Financial handbook for independent training providers.

(f): We may grade financial health as ‘Inadequate’ if organisations do not submit additional financial information to us when requested.

(g): We will grade financial health as ‘Inadequate’ where:

• we are unable to open the information submitted
• the information submitted does not appear complete, contains errors or does not match the information presented on Companies House or the Charity Commission websites
• in our view, the information submitted does not evidence a minimum of 6 months active trading

Moderation criteria that can move a grade to ‘Satisfactory’ (either up or down)

(h): We will not grade higher than ‘Satisfactory’ if an organisation scores 0 points for any one of the three ratios.

(i): Where an organisation’s financial health is calculated as ‘Inadequate’, solely because of a deficit on the pension scheme which reduces the level of reserves, the grade may be moderated to ‘Satisfactory’.

(j): If long-term borrowings are high but are predominantly and demonstrably secured on long-term tangible fixed assets, for example a mortgage on property, then, if this significantly affects the financial health (by at least one grade) and finances suggest that sufficient cash is being generated to cover the associated repayments, we may moderate a calculated grade of ‘Inadequate’ to ‘Satisfactory’. For this moderation criteria to be considered, the financial statements submitted must clearly show this to be the case.

(k): Where an organisation’s financial health, in an isolated year, is calculated as ‘Inadequate’ solely due to making a distribution of several years accumulated profits through a dividend, resulting in a zero score for profitability. In such circumstances, we may moderate the financial health score to ‘Satisfactory’, if we consider that the underlying business is profitable and removal of dividend payments would improve the grade. However, we will not moderate the financial health grade if, in the previous year, dividends taken also exceeded profits made.

(l): We may moderate organisations graded ‘Inadequate’ to ‘Satisfactory’ upon receipt of a fully completed DfE template guarantee, where the use of a guarantee is deemed suitable and is requested by DfE. Guarantees will only be accepted from UK based companies that are connected to the organisation DfE contracts with. Any decisions to accept a guarantee will be taken in conjunction with your account manager.

(m): We will not grade higher than ‘Satisfactory’ if an organisation’s score is based on management accounts.

(n): We may consider moderation to ‘Satisfactory’ where an organisation can clearly demonstrate that there has been an exceptional loss of income or has incurred exceptional expenditure due to a rare or unusual events, for example COVID-19, which results in an ‘Inadequate’ autoscore. This moderation will only be considered when financial statements are supported with evidence demonstrating that there will be a return to an improved financial position in the following financial year.

(o): Where an organisation has received government loans, for example Coronavirus Business Interruption Loans during the COVID-19 pandemic, these will be classed as borrowings. We may moderate organisations graded ‘Inadequate’ to ‘Satisfactory’ where this government loan is the only reason for the inadequate grade and the business still appears viable. The value and details of the loan must be clearly identifiable within the financial statements.

Other moderation criteria that can impact the grade awarded

(p): If there is a group or parent organisation or company whose financial position could significantly adversely impact the financial health of the organisation, we may moderate the grade downwards.

(q): Where information other than the latest available financial statements, supported by factual evidence, indicates that the financial health is significantly adversely different from the autoscore. ‘Significantly’ is defined as sufficiently different to generate an autoscore at least one grade lower. Examples might include (but would not be limited to):

• a court ruling which has financial consequences
• the loss of a material contract or area of provision
• a contingent liability crystallising
• recall of debt by the bank or investor
• a significant recovery of funds following a funding audit or investigation
• loss of key personnel
• cessation of trading

(r): We may consider moderation to a lower grade where profits from sale or disposal of assets, exceptional items and profits from discontinued operations increase the grade of an assessment, but where the underlying business is loss making and would, without these one-off profits, result in a lower grade.

(s): We may consider moderation where an organisation is in a group with a higher education institution as the parent body, by taking into consideration the subsidiary or parent relationship. Special moderation procedures will apply, and considerations will include (but are not limited to):

• the financial health of the parent organisation
• any financial guarantees or letters of comfort provided by the parent organisation
• the pattern of any financial support provided and the nature of the relationship or transactions between the bodies

2.14: DfE will moderate the autoscore grade by assessing both the underlying financial health of the organisation and, where applicable, its parent organisation, and its medium to long term sustainability. DfE may require the organisation to provide bespoke information.

Engagement following inadequate financial health grade

2.15: The Post-16 intervention and accountability policy outlines how DfE maintains oversight of independent training providers and confirms that where a training provider has ‘Inadequate’ financial health, we will consider each case on its merits and may conduct a review, but reserve the right to take action in accordance with the training provider’s contracts or agreements.

If you have any questions following notification of an ‘Inadequate’ financial health grade, you should contact your account manager.

Part 3: Recommended funding limits

3.1: A key outcome of the financial health assessment process is using the financial health grade to set a maximum Recommended Funding Limit (RFL). The RFL is a measure of an organisation’s financial capacity to deliver. The funding limit will also vary depending upon whether the organisation is new or has an existing contract with DfE. There are other constraints that may impact an organisation’s capacity to deliver, such as its infrastructure.

3.2: The concept of a RFL is not applicable to organisations considered to be exempt from financial health assessments.

3.3: DfE will calculate the RFL as a percentage of the organisation’s turnover from their latest annual financial statements. The relevant percentage is determined as follows.

Grade	Organisations that hold an existing DfE contract	Organisations that do not hold an existing DfE contract but have financial history	Organisations that do not hold an existing DfE contract and are assessed based on management accounts and forecast
Outstanding	150%	100%	N/A
Good	125%	75%	N/A
Satisfactory	115%	50%	See paragraph 3.4 to 3.5
Inadequate	0%	0%	No contract

3.4: DfE considers organisations that do not hold an existing contract with us at the time of assessment a greater risk. We will calculate the RFL on a reduced percentage. The maximum RFL awarded for new providers which do not hold an existing contract with us is £2 million.

3.5: We will assess management accounts and forecasts individually on their own merits and will set the RFL at the turnover in the accounts and forecasts to a maximum of £1 million. A maximum grade of satisfactory will be awarded to management accounts and forecasts we consider viable.

3.6: If management accounts are specifically requested and reviewed for organisations that hold a current contract with us, these will not result in an amendment of their grade or RFL.

3.7: Before contracting, the financial health score and RFL may be used to inform contract negotiation.

Annex A: Financial health descriptors

This annex provides the definition of each financial health grade and their financial indicators.

Score	Grade	Definition	Indicators
240 to 300	Outstanding	An organisation that appears to have robust finances to fulfil its contractual obligations and to respond successfully to opportunities or adverse circumstances.	Normally an organisation with outstanding or good indicators for profitability, solvency and gearing.
180 to 230	Good	An organisation that appears to have sufficiently robust finances to fulfil its contractual obligations, and to respond successfully to most opportunities or adverse circumstances.	Normally an organisation with at least 2 good indicators for profitability, solvency and gearing.
120 to 170	Satisfactory	An organisation that appears to have sufficient resources to fulfil its contractual obligations, but also appears likely to have limited capacity to respond successfully to opportunities or adverse circumstances.	Normally an organisation with at least 2 satisfactory indicators for profitability, solvency and gearing.
</= 110	Inadequate	An organisation that is in financial difficulty and very likely to be dependent on the goodwill or financial support of others. There is a significant risk of organisations in this group not being able to fulfil contractual obligations because of weak financial health.	Normally an organisation with at least 2 inadequate indicators for profitability, solvency and gearing.

Annex B: Definition of financial elements

This annex sets out the definitions of the financial elements used to determine the financial health grade.

Profitability

Profit after tax as a percentage of turnover, defined as:

Profit after tax ÷ turnover x 100

For this purpose, depreciation and amortisation charge for the year are added back to profit after tax and dividends are subtracted.

Solvency

Current ratio defined as:

Current assets ÷ current liabilities

Gearing

Total debt as a percentage of reserves and debt.

Reserves are defined for this purpose as shareholders’ funds less intangible assets. If this is a negative figure, an automatic score of 0 is given.

Debt is defined as all long-term and short-term borrowings, which include:

• bank overdrafts
• bank loans
• finance leases
• hire purchase contracts
• credit cards
• ‘inter-company’ and group loans to the organisation
• personal loans to the organisation
• amounts owed to directors (including directors’ loans, directors’ current accounts and any other amounts owed to the directors)

We will include ‘other creditors’ within the debt figure if we are unable to identify the scope of borrowings contained within this figure. A breakdown of ‘other creditors’ must be supplied alongside the submission of your financial statements. ‘Other creditors’ are determined as any item recorded within either current or long-term liabilities that is not identifiable in its own right. It will be referred to within the creditors notes of the financial statements as ‘other creditors’ or ‘other payables’.

We will also include as debt amounts owed to group undertakings, if shown in the creditors note, unless it is stated as trading activity or other non-debt related activity.

Annex C: Financial health scoring

Score	Profitability (%)	Solvency	Gearing
0	< 0	< 0.5	>= 90 or negative
10	>= 0	>= 0.5	< 90
20	>= 1	>= 0.6	< 80
30	>= 2	>= 0.7	< 70
40	>= 3	>= 0.8	< 60
50	>= 4	>= 1.0	< 50
60	>= 5	>= 1.2	< 40
70	>= 6	>= 1.4	< 30
80	>= 7	>= 1.6	< 20
90	>= 8	>= 1.8	< 10
100	>= 9	>= 2.0	= 0

Annex D: Financial figures collated as part of the assessment process

We gather financial information beyond that required to calculate the profitability, solvency and gearing ratios. We do this to help support the assessment and understanding of the finances for organisations we work with. We collect the information from the organisation’s financial statements that are submitted to us, where available. Where the information is not available from the full financial statements, we record zero.

The account names below may differ on your financial statements dependent upon the type of organisation. The names used are those most widely recognised but this is not a comprehensive listing. These are the amounts or charges shown for the year or period that your financial statements cover. References to Profit and Loss Account also mean Income and Expenditure account (I&E), Statement of Comprehensive Income (SoCI) or the Statement of Financial Activities (SoFA). References to balance sheet also mean Statement of Financial Position.

Where financial statements show both consolidated and company figures, we will use the consolidated amounts.

Financial figures required for profitability, solvency and gearing ratios

This section provides the common location of figure used.

Turnover

Turnover may also be termed total income or revenue.

Located near the top of the profit and loss account (P&L).

Depreciation and amortisation charge for the year

Commonly obtained from the notes to the accounts. There will be separate notes for  depreciation and amortisation, if applicable. Both figures are required where there are values.

The figures used are the charge for the year.

Depreciation is associated with tangible fixed assets.

Amortisation is associated with intangible fixed assets including goodwill.

Profit or (loss) after tax

This may also be referred to as surplus, deficit or ‘Net movement in funds’.

Obtained from near the bottom of the profit and loss account. If a loss, this is recorded as a negative figure.

Dividends

Located in statement of changes in equity and/or notes to the accounts. If a dividends value is not visible within the financial statements but has been allocated, a calculation from retained profits can also identify this value.

Not all organisations pay dividends.

Intangible assets 

Located near the top of the balance sheet. Goodwill is also classed as an intangible asset.

Not all organisations have intangible assets.

Total current assets

Usually located within the top half of the balance sheet and may include figures for stock, positive bank balances, cash in hand, and debtors with a total amount listed.

If there are debtors recorded as due after more than one year, these will be excluded from the total current assets figure used within the assessment.

Total current liabilities

Obtained from the balance sheet. Usually shown in one line and commonly called ’Creditors: amounts falling due within one year’.

Shareholders’ funds / Net Assets (liabilities)

Taken from the balance sheet. If this is a net liability, then this is recorded as a negative figure.

Some balance sheets contain creditors / liabilities in the bottom half. To calculate the figures used for assessment purposes, the assessment will move the liabilities to the top half and recalculate the net assets / net liabilities figure.

Total borrowings and debt

Accumulation of all types of borrowings and debt, whether secured or unsecured, taken from both short-term (within one year) and long-term (greater than one year) creditors.

The submission of financial statements and gearing ratio sections provide detailed breakdowns of amounts we include as borrowings and debt within the assessment, including further explanations around other creditors and amounts owed to group undertakings.

Additional financial figures collected

Gross profit

This is turnover less cost of sales and is therefore located in the top half of the profit and loss account below cost of sales, where applicable.

Not all types of organisations contain a gross profit figure.

Administration expenses

Located either:

• as a singular line in the profit and loss account
• as multiple items on the profit and loss account
• within the organisation’s detailed profit and loss account

Items contained within cost of sales are not included.

Charities may refer to this as ‘expenses from charitable activities.’

Staff costs

Located either:

• within a specific note to the accounts
• as a single line on the profit and loss account
• as multiple items within the organisation’s profit and loss account

Wages and salaries, national insurance (NI) and social security costs and pension costs for staff and directors are included.

Staff costs can be shown within the cost of sales and / or administrative expenses.

We do not include agency staff or sub-contractor costs within this figure where these are separately identifiable.

Cash at bank and in hand

Obtained from the organisation’s balance sheet, contained within the current assets section, if the organisation is showing a positive cash position (if the organisation has a negative cash position, for example a bank overdraft, it will be included in creditors).

It may also be referred as ‘cash or cash equivalents’.

Amounts owed by group undertakings

Obtained from the debtors notes to the accounts, where applicable.

Within the debtors notes you may find amounts due within a year and amounts due greater than one year. These will be added together to gain the total value.

This is different to amounts owed to group undertakings which would appear within the creditors notes, where applicable.