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.

Despite the absence of details for profit and loss, short form accounts actually contain everything needed to assess the degree of risk that may be attached to either selling to a company on open credit or advancing any other form of loan

To begin with, this is what a balance sheet you can obtain from Companies House might look like.

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 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 / working capital but very large equity / net worth. Don't allow yourself to be fooled by this.

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 cash flow arising from its core trading activities.

Net assets / Equity on the other hand will usuually carry a significant value for fixed assets.Their written down net book values as show 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.

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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