FINANCIAL ANALYSIS - 12.04.2021

Investigating a company using filleted accounts

Most small companies only submit filleted accounts to Companies House which don’t include a profit and loss. How can you assess the financial risk of doing business with a company by looking at just its balance sheet?

Filleted accounts

Filleted accounts are submitted by small businesses. A company qualifies as small if it meets at least two of the three following criteria for two years in a row: (1) annual turnover of £10.2 million; (2) balance sheet total of £5.1 million or less; and (3) no more than 50 employees on average. Whereas larger firms must be 100% transparent with their accounts - providing details on profits and losses as well as detailed explanatory notes - a small company has the option to submit no more than a simple balance sheet. Tip. If yours is a small company, check that your accountant is submitting filleted accounts to prevent your competitors or other interested parties from learning too much about your business.

Businesses that want to protect themselves against the financial risk of doing business with a company use the accounts of a company to better understand the financial position. So only having a balance sheet can be frustrating as it prevents you from gaining the full picture. But despite being shortened accounts, there are still lots of things that you can learn by analysing the data.

Investigating the balance sheet

Sales. Assuming that the debtors figure represents money owed to the company from customers, it’s possible to use this information to predict the company’s annual turnover. To make this estimation, you must find out the company’s payment terms. You may be able to take an educated guess if the company is in a sector you know a lot about. Example. If the terms state that customers have 30 days in which to pay and debtors are showing as £104,456, you can assume that debtors represents 30 days of sales. Divide one by the other and multiply by 365 to get an annual gross sales estimate: £104,456 /30 x 365 = £1,270,881.

In our example, the company has exceeded the VAT threshold of £85,000 turnover per year, so to find out the company’s sales net of VAT, just divide by 1.2 giving £1,059,068 in this case. Tip. Be aware that this is a really big assumption. Lots of other factors such as cash payments, non-customer debtors and seasonal fluctuations can affect the accuracy of the estimate. But it should give you some indication of the level of sales.

Sales growth. If you do the above calculation for the previous year as well, you could estimate the change in sales. Divide this change by the prior year’s sales to get the percentage increase/decrease in sales. For example, if the prior year’s debtors were £116,906, then the estimated sales are £1,185,297 and the change in sales is -£126,229 which means sales have fallen by:

-£126,229/£1,185,297 x 100 = -10.65%.

Profit margins. The creditors figure can be used to work out how much money the company spends in a year. This also requires an assumption on payment terms and uses the same method as how we worked out annual sales above. Be aware, however, that this figure could include any loans taken by the company, which will skew the results. Once you know the sales and expenditure, you can then work out a profit margin by finding the difference between sales and expenditure and multiplying by 100.

For an example balance sheet analysis, visit https://www.tips-and-advice.co.uk , Download Zone, year 13, issue 7.

Provided the balance sheet shows the debtors figure and you know the company’s credit terms, you can make an estimate of the company’s annual sales and sales growth. You can also use creditors to estimate the company’s outgoings and the company’s net profit margin. But bear in mind that creditors could also include loans which will skew the results.

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