The CAA introduced their new financial assessment over a year ago now.
To recap – The extent of the financial assessment depends on the size or type of license held.
For standard ATOL holders with licensable turnover of less than £20m, the financial assessment looks at a set of 7 financial ratios, and for Small business ATOL holders, a set of 4 financial ratios are assessed. These ratios will then provide the CAA with a score which determines whether the business meets their requirements. Those ATOL Holders with an ATOL limit in excess of £20m are subject to a more in-depth risk based approach as well as monthly monitoring.
For the first time ever, the CAA also introduced an online self assessment tool which basically gives you an indication whether your company meets their financial requirements before submitting your accounts.
Although this has proved to be very beneficial for the industry as a whole, for some it remains a mystery how a company that comfortably passed the old Free Asset Test now fails the new assessment criteria just because of their business model, and in particular how and when the business makes advance payments to suppliers for commercial reasons. How is it possible therefore for such a company, that may well be trading successfully for a number of years, to now fail this new financial criteria. Is this for REAL?
Last month we saw the third round of submissions made to the CAA under the new financial requirements.
We make more than 100 ATOL submissions every year and I would like to highlight one particular ratio all Standard and Small business ATOL Holders need to pay close attention to if you are paying suppliers in advance. The cash ratio. This is cash over current liabilities. It is another measurement of a company’s liquidity and their ability to meet their short term obligations using cash only.
Most Tour Operators pay suppliers in advance by using the money received from their customers for future bookings, which we feel is good business practice and makes commercial sense. However, cash balances held at the year-end are therefore likely to be less than advance receipts received from customers that are shown in current liabilities.
In such circumstances the cash ratio could be low, and unfortunately the CAA does not factor in advance payments to suppliers that is sitting in other debtors in your current assets; their reasoning being that in the event of a failure of an ATOL Holder, those suppliers often do not fulfil the service for which they have been paid for. At the same time it is also not realistic for a company to hold advance payments to suppliers for a variety of business reasons only to meet the right and acceptable cash ratio.
We are not definite as yet of the weighting this ratio has over the other financial ratios but have come across instances where a low cash ratio has led to failure of the financial criteria. For now, the reality is, that this is something for you to bear in mind and perhaps plan for before your next financial year end and submission deadline and we will try to follow this up with the CAA.
To talk about this in more depth, please do feel free to contact Yasin Khandwalla on 020 7600 5667 or at Yasin.Khandwalla@elmanwall.co.uk