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

When dealing with business customers on open credit terms it is essential that you can be sure they can pay your invoices on time or even pay them at all.

The way to do this is to check their filed accounts, specifically the balance sheet through the Companies House website. The majority of those accounts however are in short form, meaning that . while profit details are going to be absent the much more important balance sheet details are not. It is the balance sheet that tells you about risk, not profit and loss.

To begin with, here's an example 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

Working Capital; Current Ratio

The number that counts is net current assets (current assets less current liabilities) describing in turn the working capital of a business: It defines financial liquidity; the sole source of cash flow from core trading.

If working capital is in deficit, it means that a business's cashfow will be insufficient to service all of its debts as and when the time comes to pay.

The True Value of Equity / Net Assets

The bottom line of the balance sheet is net assets / equity, also known as net worth. However this rarely, if ever represents its true monetary value.

Fixed assets often play a large part in the vaue of net assets though. While recognised as essential to enabling operating activity, they also represent cash and financial resources that are not going to be available for paying the bills.

Worse still, the depreciated values of fixed assets are almost always higher than their true values in the event of a fair sale. In some cases, assets such as "improvements to leasehold properties" will have had zero cash value from the very start. This is why "net worth" should not be relied on when assessing credit worthiness.

No matter how big are net assets, working capital measures whether or not a company can be regarded as a good risk for open credit terms - nothing else.

Late Filing of Company Accounts

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

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 forecast liquidity as well as profits, balance sheets among the thirteen foreasts Figurewizard produces. This is done quickly and efforlessly, from nothing more than your estimated figures for sales, margins, overheads, investment.and a few simple ratios.

All you have to do is enter those estimated figures. Figurewizard does the rest, incuding automatically calculationg and applying VAT and corporation tax.

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