Credit Checking - How to Read Micro or Short Form Accounts

Small company accounts filed at Companies House only show short form or micro balance sheets but that is all you need to check credit worthiness.

What to Look for in Short Form Accounts

Companies House website carries copies of all filed UK company accounts. The vast majority of these are SME's where only truncated (short form) balance sheet details are disclosed.

However short form accounts will contain everything that is needed to indicate the degree of risk attached to either selling to a company on open credit or advancing any other form of loan.

To start with, here is a specimen of a typical short form balance sheet you can obtain from Companies House.

Tangible (Fixed) Assets   175,000
Debtors 90,000  
Cash in Hand 25,000  
Current Assets   115,000
less: Creditors Payable Within One Year -70000  
Net Current Assets / Liabilities   45,000
Total Assets less Current Liabilites 220,000  
less: Creditors Payable After One Year -130000  
Net Assets   90,000
     
Paid Up Share Capital 5,000  
Profit and Loss Account 85,000  
Shareholders Funds (Net Worth)   90,000

Working Capital; Current Ratio

Net Current Assets calculated as current assets less current liabilities represents the working capital of any business. It also broadly defines its liquidity.

This is by far the most important number: A balance sheet forecast showing a reasonable surpus means that the company is likely to be good for the money. That will not be the case if net current assets are in deficit.

Increased borrowings will improve cash but not liquidity. Because liquidity is generated solely from core trading activities the risks remain: Borrowings only represent a short term remedy not a cure.

Reading Balance Sheet Solvency

The specimen balance sheet working capital of 45,000 indicates short term liquidity and the prospect of positive cash flow. 

It is however possible for a company to be showing a deficit for net current assets but very large equity / net worth. Don't allow yourself to be fooled by this.

Point one is that fixed assets are never intended to be cash convertible and point two is that their depreciated net book value usually does not represent anything like fair resale prices. Those values only represent their residual useful working life, which will be lower than a market price.

Worthless Fixed Assets

Some fixed assets such as "improvements to leasehold properties" as part of equity / net worth are worthless in cash terms.

That is because they are simply capitalised expenditure, the benefits of which will revert to the owner of the property at the end of the  lease without any financial liability attached.

By 2017 their net book value was £43 million. A year later when they could no longer pay their bills and £72 million of debt, administrators were called in to supervise a CVA. The immediate result of that was writing off the improvements; turning £14 million of equity / net worth into a deficit of £29 million.

Another £11 million of net book asset value in kitchen equipment, cutlery, plates glasses and so on would be heavily discounted too, perhaps by as much as 90%.

Fixed Asset to Net worth Ratio

There is a fixed asset ratio which can be used to define the safety of fixed assets vis-a-vis net worth

To calculate the fixed asset / net worth ratio, simply divide total fixed assets by net worth. In the case of our specimen balance sheet this comes out at 1.94 and that is more than the 0.75 that is usually reckoned to be a safe maximum.

Late Filing of Company Accounts

Apart from the annual accounts, Companies House also lists the dates upon which the next filings are due and notes to advise where filings are overdue. There can be many reasons why filings are overdue - None of them good.

Managing your Balance Sheet

For any SME there's a lot more to a strong net current assets position and a fixed asset / net worth ratios of 0.75 or less than accounting technicalities.

These really are the keys to ensure that a healthy balance of cash and cash convertible assets are always available so that a business can pay its bills on time. Failure to do inevitably leads to insolvency and the only safe way to avoid that is to properly plan and forecast profits, liquidity and cash flows.

Follow the links below (especially for the interactive What-If calculator to see how Figurewizard enables you to do this online, quickly and easily just using your estimated figures for sales, margins, overheads and investment. You enter those and we do all of the rest.

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