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.
Not all fixed assets are worthless though like company cars for example. When my company sells a car it usually goes for more cash than its net book value.
Equity, which will always balance with total net assets is the sum of capital and retained profits but what matters is on what that equity has been spent. In the case of the example of the company with cash in the bank the bulk of the profits have been invested in the fixed assets such as fixtures and fittings, office equipment and possibly a car or two, not on the much more important current (cash convertible) assets.
I used to work in an accountant in a firm specialising in administration and receivership and I can tell you that if we had ever managed to get as much as 10% in the pound for fixed assets at net book value, we reckoned we would have done well. We never did manage to get that much.
With respect to action lady, if a company is reduced to flogging off its fixed asset ( even if they are fetching reasonable prices) in order to pay the bills, its prospects going forward will be pretty dire.