EXECUTIVE REPORT
Keep good company
How can a business be confident its customers are going to pay them? Adam Bernstein offers some basic guidance.
Delayed payments can be hard to recover from corporate customers as the debts of the entity generally stand distinct from the assets of individuals. However, in exchange for this protection, companies must put certain information, including their accounts, into the public domain.
Peter Windatt, a director of BRI Business Recovery and Insolvency, says that in practical terms, the basics of accountancy are the same for all businesses. “Differences arise when assets are acquired through different mechanisms such as a lease, contract hire, and lease purchase, and when assets are sold using different methods such as sale or return, consignment stock, sale and leaseback.”
It is 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 at a given moment in time via a snapshot of the balance sheet.”
The problem with accounts, and a point often missed, is that they are not required to look into the future. “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,” he says.
Looking for guidance
Stephen Diver, manager with financial reporting advisory group, Grant Thornton UK LLP, says, “It is possible to review trends within a set of accounts, as typically two years of information is disclosed, and previous statutory accounts may be downloaded from Companies House.” He adds that, when assessing trends, it is important to read all information in the statutory accounts: for 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 to look for, Peter Windatt says, “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.” He also says that “abridged accounts will not include a profit and loss account. As such, performance may be more difficult to assess for smaller
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companies.” 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 the company.
Accounts can highlight balances that a company owes which may only become apparent when an action to wind up the company is brought by a creditor who has had enough. Here, any debts owed above a modest £750 and any company that hasn’t the cash to pay can be felled.
Previous statutory accounts may be downloaded from Companies House.
Accounts are just part of the story. Organisations should know what type of business they are dealing with – a sole trader, partnership or some form of limited company. “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, they can cut the string on and watch it fall with little damage to themselves,” says Peter Windatt. He also says to look for the obvious such as too many round figures. “Look for sudden changes. See if debtor days are rising - they 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 list, Stephen 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. It is also 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.
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? Peter 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.” And remember, Companies House is just a repository - it doesn’t fact-check.
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