NEWS EXTRA


dig,” says Windatt, “the more acronyms you will find and for each type of company and there will be key measures which will help you identify those whose performance is good from those whose performance is poor.” Something else to consider, says Diver, “is that abridged accounts will not include a profit and loss account. As


such, performance may be more difficult to assess for smaller companies.” He advises that an alternative is to calculate the movement in retained


earnings between the two years disclosed, as in most instances this will equal the profit or loss for company. However, as other items may be included in this movement, it’s not an exact measure.


Accounts can highlight large creditor balances. Could it be a problem for a debtor company? Maybe, but only when a large creditor believes it to be so. For others the problem will only become apparent when there’s an action to wind up the company; debts above a modest £750 and a company that hasn’t the cash to pay can be felled. A legal definition of insolvency is found in s.123 of the Insolvency Act – either assets are exceeded by liabilities, including contingent and prospective; and/or the company is unable to pay debts as and when they fall due. Fundamentally, as Windatt


says, the adage turnover is vanity, profit is sanity and cash is reality is not too far from the truth –


“ Look for a


sudden change in something - anything. See if debtor days are rising, as this will indicate the company are selling but not getting paid.


”


“anyone can sell at a loss - profit is good on paper, but it’s not a sign that you will survive if you can’t get the cash in from those who owe you.”


Getting a feel for customers


Accounts are just part of the story as firms should know what type of business they are dealing with – a sole trader, partnership or some form of limited company. Says Windatt: “Don’t be too re-assured that a firm says in its accounts that it is ‘Part of the XYZ Group’ because that only means it is a kite which, if it doesn’t fly as they might like, they can cut the string on and watch it fall with little damage to themselves.”


While a merchant might


think to look at its customers, it shouldn’t forget to also


understand the financial health of its suppliers. Just as customers may not pay, deliveries will


cease if essential supplies aren’t available following supplier failure.


He also says to look for the


obvious such as too many round figures. “Look for a sudden


change in something – anything. See if debtor days are rising as this will indicate the company are selling but not getting paid; do the same for creditor days - purchases are not being paid for. Also look for changes in the board room, remembering that some firms might not record changes at Companies House which is riskier still.”


To this Diver adds gross


margins (profit) levels driven by cost savings; fully depreciated fixed assets that need replacing soon; loans that need repaying within 12 months and whether the business has the money to do so; also see if there are any related parties that have loaned sums to the business or if any sales or costs are associated with them. Diver believes that it’s important to look for “consistent losses, particularly if accompanied by a declining trend. An increase in liabilities may not be an issue if this is to fund for example capital expenditure but it’s likely to be a concern if funding losses.” In some cases, the directors’ report may provide some insight into the reasons for say losses or increases in liabilities.


A quick search on Companies House will show a variety of forms of company accounts – some long, some short. Should a short set of accounts be viewed with suspicion? Windatt thinks not: “If directors are acting


wrongly, they won’t file accounts or will make them up and wait for someone to catch up with them.” Remember, Companies House is just a repository of


information, it doesn’t fact check. To conclude


With accounts it’s important to take a nuanced view as risk is a function of doing business on credit. Do the homework, take an informed view, and then do what is likely to be for the best.


BMJ FA TER FASTER


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February 2019


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