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.

How to read Micro Accounts

Companies House website carries copies of all filed UK company accounts. The vast majority are for SME's or micro companies where only short form or micro balance sheet details are disclosed.

Despite the fact that details for profit and loss are not usually disclosed, short form accounts do show the balance sheet. That contains everything you need so as to assess the level risk atached, either to selling on open credit or advancing other types of loan.

To begin with, this is an example of the sort of a short form or micro balance sheet you will find on Companies House website.

Fixed Assets   15,500
Current Assets 93,250  
Creditors due within 1 year (88,500)  
Net Current Assets / (Liabilities)   4,750
Creditors due after 1 year   -6,250
Net Assets   14,000
Capital & Reserves / Equity   14,000

Reading Balance Sheet Solvency

The specimen balance sheet shows working capital of 4,750 above indicates liquidity.

It is however possible for a company to be showing a deficit for net current assets / working capital but very large equity / net worth. Don't allow yourself to be fooled by this as only positive working capital counts when assessing a company's ability to pay its bills on time.

Net assets / Equity will usuually carry a significant value for fixed assets.Their written down net book values shown in the balance sheet simply represent the values of their residual uselful working lives, not "fair value."

 On occasion some significant net book values such as improvements to leasehold property can actually represent zero cash value. They simply represent expenditure that has been capitalised to be then written down over the lifetome of the leasehold.

Working Capital; Current Ratio

Known as the current ratio, net current assets (current assets less current liabilities) describes the working capital of a business. This also broadly defines liquidity.

Working capital is by far the most important number for credit control purposes: For example when planning your business for the year ahead, a balance sheet forecast showing positive working capital means that your company is likely to be good for the money.

That is because working capital is the sole source of a company's liquidity, arising from its core trading activities.

Cash Flow and Borrowings

Increased borrowings will improve cash but not liquidity. Because liquidity is generated solely from core trading activities the risks remain: Borrowings, no matter how much cash they represent are only a short term remedy not a cure.

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. The perceived wisdom is that up to 0.75 is reasonable. However it is working capital alone that rules the roost where liquidity is concerned, whatever the fixed asset ratio is telling you. 

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 so inevitably leads to insolvency and the only safe way to avoid that is to properly plan and forecast profits, liquidity and cash flows.

Forecasting and Planning Liquidity with Figurewizard

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 just enter your forecast figures and a few simple ratios and we do the rest.

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