- 13 Jun
Notes On Analysing A Company Balance Sheet.
Analysis of a company's balance sheet allows you to understand what assets and liabilities fall within the business, and whether the business is liquid (has enough liquid assets to pay its short term creditors as they fall due) and solvent i.e. assets exceed liabilities. Therefore it can be helpful in trying to establish the financial position of a company e.g. to decide on granting a credit account.
Analysing The Balance Sheet
Firstly I should say that the balance sheet will always be out of date, as the assets and liabilities can change rapidly after the balance sheet has been struck. The balance sheet is like a snapshot at a given time. The balance sheet is a statement of the assets and liabilities of a company at a given time.
Estimating Profit & Loss Performance
Within the balance sheet of the company there is normally an entry titled "retained earnings" or similar. This reflects the retained profit or loss figure for the business It's over time. If you are looking at two years worth of accounts, the difference between the retained earnings shown in the first years balance sheet, and the second years balance sheet gives you some indication of the trading success of the business.
For example, if the retained profit and loss account has increased, it suggests that the company has made a profit over the period. If the retained profit and loss account has reduced, it suggests that the company may have made a loss during the period. However, These figures are not as straightforward as they may appear.
If a company were to make say a substantial profit, but then the directors chose to draw out more than that years profit in say dividends, that could result in a reduction in the retained profit and loss account. Therefore, caution needs to be taken when using these type of properties to assess the profitability of a business. Looking at the profit and loss account, is a better way of assessing the trading performance of the company.
Net Worth - Assets & Liabilities
Considering the balance sheet, the first, is to see if the business has an overall net worth. This would be a surplus of assets over and above its liabilities. Whilst this may be an indicator of financial strength, it should be borne in mind that balance sheets are always historic, and the value of assets in a business failure situation can be substantially lower than the value they are recorded in the books of a company. Nevertheless, this can be an indicator of the substance behind a business.
Also bear in mind that the asset values can move from moment to moment as the company spends cash. So seeing a large cash balance in their year end accounts is no guarantee that they still have that same amount of cash. Indeed some companies actively retain as much cash as possible, over their year end, in order to maximise the amount shown in their balance sheet.
Returning to the net worth, I would then look further, beyond just the bottom line net worth figure, in order to understand how this has made up.
The type of assets Included within the balance sheet can give rise to either reassurance about the companies position or raise concerns. For example, one category of assets are "intangible assets". This is a class of assets that can include things such as goodwill within the business, or intellectual property. The value of these assets can be somewhat subjective. I have seen examples of balance sheets where substantial intangible assets have been added into the balance sheet, in order to increase the net worth. Whilst this may be absolutely allowed within standard accounting practice, some might question the value of some intangible assets should the business fail.
On the other hand, and assets such as cash, could be considered a very liquid assets that would demonstrate a position of strength. There are other numerous other methodologies that companies can use to increase the reported position on their balance sheet. I've recently seen a set of accounts from a company that showed a negative net worth, when the share capital and retained profit and loss account were added together. However, the business had been taken their long-term liabilities, shown them underneath the net worth on the balance sheet, and reported a far more substantial, positive figure at the foot of the balance sheet. At a glance, this would appear to show a much more substantial business. However, whilst liabilities may not be due for more than a year, This is very different from worth within the company.
Another key consideration when looking at the balance sheet of a company, is to understand how liquid is the businesses. The liquidity is normally calculated by taking the short-term liabilities (those payable in less than a year) and deducting them from the value of current assets. Current assets include those which are able to be liquidated quickly e.g. outstanding debtors, cash and stock. By deducting the liabilities from the current assets, it gives a measure of liquidity i.e. how easily a business would be able to meet its short-term creditors.
In a business where the current liabilities substantially exceed the current assets, and liquid trading position could lead to cash flow problems. You may want to remove stock from the equation, as it requires to be sold in order to create cash. This gives a further reduced asset position which when reflected as a proportion of the liabilities is called the "acid ratio" - the most cautious measure of liquidity.
Inter-Company Trading & Support
The other factor which I often consider when looking at an individual that has a number of businesses, are the interdependencies between the businesses. For example, you can find that there are intercompany loans, or debts between group companies. I always try to use the filed accounts to unpick these types of inter-relations, in order to better understand the financial position of a group of companies overall. For example, if two businesses are owned by one person, and one business owes a substantial amount to another, that could show as a substantial asset to the second business, giving it what appears to be a much stronger financial position. However, if the group were to fail, it is obviously likely that intercompany debt may not be repaid.
Help With Credit
If you need help understanding whether or not to grant credit, or you are looking for protection against bad debts, please contact us and we will refer you to parties that can help.
also please read my notes on analysing financial accounts.
The above is not intended to be a comprehensive guide to analysing financial accounts, and I am not an accountant, but it includes some pointers based on the approach that I tend to take. If you need help understanding financial accounts, you should seek support from a qualified accountant.
- 11 Nov
How To Get Invoices Paid
This post explains the steps that you can take to get invoices paid.When you offer your customers trade credit, typically you will raise a credit invoice that you send to the customer to request payment at a given future date. At that point the customer becomes your debtor.In some trades, such as construction, instead of an invoice an "application for payment" is presented to the customer. Which...
- 11 Oct
Credit Control Tips
Credit control is a key part of the services that we find for our clients, therefore I am always on the lookout for credit control tips that we can share. Recently I have seen a couple of useful articles, listing some invoice chasing tips.You can also read our free guide to running your own credit control function.Veritas shared an AAT publication - "Chasing Late Payments Without Awkwardness"....
- 13 Aug
Pre-dunning is the practice of contacting a debtor, to confirm that payment is due to be made, before the debt has fallen due. This can form part of your normal credit control process to chase in outstanding debts."Dunning" is the process of communicating with debtors regarding the collections of accounts receivable. "Pre Dunning" is when you communicate prior to the debt having fallen due.Whilst...
- 23 Jul
100K Average Sales Outstanding Are Not Being Chased Up.
According to new research on behalf of Lloyds Bank Commercial Banking, London based businesses are owed an average of £98,000 in outstanding customer invoices, and a third of UK businesses that were paid late in the last year, DID NOT chase up their outstanding payments.This research was reported by Business Money (10th July 2019), and it is unbelievable to think that London businesses could...
- 07 Jun
How I Analyse A Profit And Loss Account
Analysing the profit and loss account (P & L) of a company can give you some idea of how well the business is trading. You should be able to see if its sales volume is growing, or decreasing. You should also be able to see whether it is profitable, or it is loss making.Growth or profitability provides no guarantee that you will be paid on time, or that the business even has the money to pay you....
- 06 Jun
How I Analyse Financial Accounts
Analysing the financial position of an individual or a person is not a straightforward thing to do, but having spent a number of years working within credit underwriting, I have dissected countless sets of financial accounts.Often the information that is available, even if you subscribe to credit information services, it can be fairly limited. In addition to financial accounts (which you can get...
- 05 Jun
A Warning About Invoice Fraud.
Avoiding invoice fraud is an important part of providing invoice finance and running any business. We were recently speaking to one of our funding partners who outlined a fraud methodology that is being currently being used. This method of boosting the credit worthiness of a company had been used in an attempted fraud against this particular funder.The fraudsters start by acquiring a company...
- 15 Apr
Help Raising Sales Invoices To Customers On Credit Terms
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- 22 Mar
Selective Invoice Finance With Free Auto Dunning
Selective invoice finance is a service that we are often asked about by prospect. There are a growing number of companies offering the service, and as I have mentioned in previous posts the operational approach and pricing can differ between providers.We have regular meetings with the providers, in order to keep up to date with the structure of their products, their pricing approach etc. We had...
- 15 Feb
Saving The Annual Salary Of A Credit Controller
According to figures published by Payscale, the average salary of a UK credit controller is now almost £21K per annum, with additional bonuses and commission averaging a further £6.5K, excluding employers national insurance, and any pension contributions you have to make (currently a minimum of 2% of earnings).DISCUSS OUTSOURCING OR FACTORINGAt the top end of the pay scale, the basic salaries...
- 18 Jan
Late Payment Problem?
Battling with a late payment problem? You might feel like you are all alone by recent research from Close Brothers Invoice Finance suggests that is not the case. It suggests that many other UK SMEs are being affected by slow payments, and this has been highlighted by several sources of independent research.Their poll found that 42.8% of SMEs say that late payments are a problem for their...
- 15 Jan
Solutions To Late Payments From Customers
Late payments are still causing cash flow problems for UK SMEs.An email just received from one of our new funding partners, My Muse, was headed "48% of SMEs impacted by late payments". It goes on to quote some recent Dun & Bradstreet research that has revealed that the average amount owed in late payments has increased by almost 25% over the last year to an average of over £80K. Within this...
- 14 Dec
Costs Of Collecting Late Payments Rising According To New Research
New research from Bacs Payment Schemes Ltd (Bacs) shows that the cost of collecting late payments, due to SMEs, has more than doubled to £6.7 billion (£2.6 billion in 2017).A huge 78% of SMEs are now forced to waiting 1 month or more, beyond their standard terms, to get paid by their customers. That is a huge amount of cash tied up in unpaid receivables.40% of SMEs affected by late payments say...
- 18 Jun
Why Do Large Companies Pay Late?
I've just answered a question posed online about "why do large companies pay late?".Firstly its worth mentioning that this does not apply to all large companies. We deal with numerous financial services companies who tend to pay very quickly.There are a couple of key reasons for some large companies paying late, which are explained below. Despite there having been a tightening up on large...
- 30 May
Collect Invoices Faster As An Alternative To Borrowing
There is a huge cash flow benefit to be acheived from collecting in your sales invoices faster, in a timely manner.The quicker you get paid by your customers, the more cash and hence working capital you will have available to your business, and therefore the less you will have to source e.g. by borrowing.If you have an outstanding sales ledger of £100,000, and a debt turn of say 60 days (the...
- 07 Apr
Do You Know The Standard Payment Terms Your Customers Can Take?
Did you know that the standard payment terms in the UK are 30 days from the date of your invoice?Many will not be aware that if you did not specify payment terms within the contract with your customer, there are default standard credit terms that will apply to your invoice. At the current time, those are payment within 30 days of the invoice date. You can check this for yourself on the government...
- 20 Feb
Chasing Invoices Via Social Media
I noticed an interest in chasing unpaid sales invoices via social media and I thought it would be good to add something about this to our existing comprehensive credit control guide.The first question is whether this is the right channel to use or not?I think the truth is that if you have resorted to using social media such as Twitter, Facebook, LinkedIn or Google+ to chase your invoices, you...
- 17 Nov
Need Help Chasing Invoices?
Do you need help chasing your unpaid sales invoices? Our focus is often on sourcing finance for our customers, but in some cases it is a credit control service that they need, and we have plenty of options available.We have a number of providers that can offer these types of services, and using them can both speed up your debt turn, get your invoices paid and remove the need to employ your own...
- 02 Aug
Credit Control Agency
One of the credit control agencies that we work with have been able to provide some first class credit control support to one of our clients, who needed help getting their unpaid invoices collected in. The agency took over the collection of the invoices from customers and they have improved the speed with with they are paid, reducing our client's debt turn. So they have a good track record of...