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 (small and medium enterprises) 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

From this, two crucial numbers arise for assessing the degree of risk associated with extending credit or not is acceptable.

Working Capital; Current Ratio

The first of these numbers is the current ratio. That is net current assets (current assets less current liabilities) which describe the working capital of a business: It broadly defines liquidity; rthe source of operating cash flow.

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 should mean that a company is likely to be good for the money.

Ths is the most important number of the two.

Fixed Asset / Equity Ratio

This ratio measures the value of non-current assets (e.g. fixed and tangible assets) divided by equity.

If that number. is less than 1 it means that the company's debt, with something to spare is supporting core trading activity, which is as it should be.

If it is greater than 1, some of the debt is supporting non trading assets meaning that there is less available to support trading activity and this must be a warning sign. The perceived wisdom says that up to 0.75 represents a good ratio.

What are The True Values of Fixed Assets

Fixed assets are recognised as being essential to the functions of any business with a useful working life of more than a year.

In order to measure the value of that working life their cost is depreciated. If that life is reckoned to be for ten years, they are deoreciated at 10% p.a. or if for twenty five years, 4% p.a.

Inevitably, true cash values of most fixed assets are likely to be much lower than shown in the balance sheet - Lower still in the event of a forced sale.

Some such assets, for example "improvements to leasehold properties" may actually be completely worthless, having never had any recognisable cash value from day one.

Reading Balance Sheet Solvency

Some companies will show a deficit for net current assets / working capital but also a very high level of fixed or non-current assets resulting in apparently strong equity / net worth.

No matter how large that may be, don't be fooled by it. Positive working capital alone is what counts when assessing a company's ability to pay its bills on time.

Liquidity and Borrowings

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

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

All of the above applies to your own business too.

Strong working capital and a fixed asset / net worth ratio of .75 or less are the bedrock of any good business. That is why, when planning and forecasting your liquidity and cash flows for the year or years ahead, the balance sheet forecast matters so much.

Forecasting and Planning Liquidity with Figurewizard

Follow the links below (especially for the interactive What-If calculator to see how Figurewizard makes it possible for you to do this online, quickly and easily using nothing more than your estimated figures for sales, margins, overheads, investment.and a few simple ratios.

All you have to do is to enter those estimated figures .and we do the rest, including calculating and applying VAT and corporation tax.

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