NEWS EXTRA KEEPING GOOD COMPANY
”In God we trust, all others pay cash” First used by The Philadelphia Inquirer in 1877, the line makes a valid point. Adam Bernstein asks how merchants can ensure they get paid...
AS CARILLION showed, corporate failure can hit the biggest of firms. And some including the BBC have suggested that the pain isn’t over.
The point is that now is as good a time as any to worry about getting paid. The issue at hand for merchants is that delayed payments are much harder to recover when a customer operates via a corporate shell.
Unless there are personal guarantees or wrongful trading or fraud can be proved, the debts of the entity stand distinct from the assets of the individual. But in exchange for this protection incorporated entities must put certain information, including company accounts, into the public domain.
Defining company accounts
Peter Windatt, a director of BRI Business Recovery and Insolvency, says that company accounts are simply a record of trading activity and in practical terms, he says the basics of accountancy are the same for all businesses. “Differences arise,” says Windatt, “when assets are acquired through different mechanisms such as by lease, contact hire, and lease purchase, and when assets are sold using different methods such as sale or return, consignment stock, sale and leaseback.” Each, he says, is treated differently for accounting purposes.
It’s for this reason he explains that accounts “enable an informed user to form a view as to the performance of a company over a period of time through the profit and loss account, and to form a view as to its solvency
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at a given moment in time via a snapshot of the balance sheet which at its simplest lists of assets against liabilities.”
He adds that a failure to keep proper books and records is an offence “which may lead a director to be in breach of all sorts of legislation and could even result in them being disqualified from being involved with a company in the future.”
Looking for guidance
The problem with accounts, and it’s a point often missed, is that while they can help form an opinion, they are not required to look into the future. That said, Windatt explains that “detailed reports and accounts for a PLC will differ greatly from a small one-man band as the disclosure requirements get more onerous the bigger a company becomes. For the average company there are no significant future-gazing requirements.” Accounts should be read with a pinch of salt. And Stephen Diver, manager, Financial Reporting Advisory Group, Grant Thornton UK LLP, agrees, noting: “As statutory accounts only present historical financial performance caution must be applied when attempting to predict future performance.” He says that for listed companies there will also be forecast financial information, although it’s not audited. He adds: “It is possible to review trends within a set of accounts, as typically two years of information are disclosed, and previous statutory accounts may be downloaded from Companies House.” Another point Diver makes is that when assessing trends, it is important to read all information in the statutory accounts, for
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Anyone can sell good on paper, but
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example a one-off event could lead to a significant profit or loss in a single period. This would not be indicative of future performance and should be disclosed in the directors’ report in the accounts.
As to what else the reader should be looking for, in broad terms, it will vary greatly with the nature of the business being considered. Says Windatt, “each type of company will have key performance indicators (KPI’s) and these will vary according to business type. Being able to analyse one company in a sector against others from the same sector is much more useful than comparing a company to all companies.”
Even then he says that the way companies are funded is important because the reader may need to consider Return on Capital Employed (ROCE) as well as Earnings Before Interest, Tax, Depreciation and Amortization (EBITDA). “The further you
www.buildersmerchantsjournal.net February 2019
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