Credit Reports & Analysis

A full credit report on a limited company will cost in the region of £35.00, however, very useful reports can cost as little as £10.00. The report will provide an in-depth analysis of that company’s financial ability. The reference agency will also provide a rating/ score i.e. 80/100 would indicate a safe risk: 60/100 is not so safe: 20/100 would probably indicate that the company is unlikely to survive (or the company may be a new business with little capital).

The reference agency will provide a full description to match the relevant score. You will also get a list of county court judgments (CCJ’s), and any insolvency action such as whether a winding-up petition has been issued, or the company is ‘in administration’ etc.

If your customer is a sole trader or a partnership you can still obtain information in the same way as you would with a limited company. The information would be more of a personal nature and would need to include a search of their home address for CCJ’s and other credit.

Published Company Accounts from Company House – Credit Report

If you can read published company accounts, you can order direct from Company House at a much-reduced fee. There are many good, simple, inexpensive books on the subject. You will not get a list of CCJ’s. Some of the biggest companies in the UK have CCJ’s: would you still deal with them? I think so. Again, if your customer is a limited company, why not ask them to provide a copy of their annual accounts as a condition within your trading terms.

For help see The Balance Sheet

Ratio’s

A purchased company report can give you a different, usually better view of the financial standing of the company than raw statistics. One way of analyzing accounts is to calculate ‘ratio’s’. Ratios give you a set of figures to match against industry and company standards. For instance:

CURRENT RATIO =

Current Assets (say) £900,000 divided by

Current Liabilities (say)£600,000 =

a

Current Ratio of 1.5

A ‘current ratio’ between 1.0 and 1.5 is average: less than 1.0 is a risk: over 1.5 is not a risk. However, this is only one ratio: there are many ratio’s, some important, most are beyond the requirement of small company credit sales.

If you want/need to use ratio’s in your assessment of your customers, you need to fully understand what the relevance of each individual ratio means to you. I suggest you buy a simple book on understanding company accounts. There are many books available that have been written for the ‘non-financial manager’. However, not all published accounts are simple to read: which could mislead you to provide credit to a struggling company.

The following is a rough guide to acceptable ratio’s (remember, you must not rely on any one piece of information).

Current Ratio

Current Assets divided by Current Liabilities: to assess ability to meet current/short term liabilities.

Acid Test

Current Assets (less stock) divided by Current Liabilities: as above, plus, the test of the company’s true liquidity (actual cash, debtors -v- creditors, loans).

R.O.C.E.

This % figure should be higher than the borrowing rate of the company (e.g. bank base 7% + 2-5% = 9% to 12%).

‘Return on Capital Employed’. Profit before Tax divided by Capital Employed x 100: to assess the profit that the company’s assets are making, as a %.

Debt/Equity

Debt (loans, overdraft, etc.) divided by Equity (shareholders funds, less intangible assets etc.) x 100 =? %:to assess whether company is using external funding to support business, or using their own money.

Profit/Sales

Profit before Tax divided by annual Turnover x 100: to assess profit margin of sales after costs.

Debtor Days Sales Outstanding (DSO)

Total of Debtors x 365, divided by annual Sales =? DSO the company’s ability to recover sales revenue.

Creditors Days Sales

Total of Creditors divided by annual Sales, x 365 Days: to assess the number of days to pay suppliers etc.

Visit Customer Premises

This is very much like walking into someone’s home. Within a short period you can evaluate standards, characteristics, preferences etc. If this option is available (especially an unannounced visit) take it. Remember no one piece of information should be relied upon. If it looks good, but feels bad, start on a low credit limit (as low as you feel is necessary). If the customer has cash problems you will know soon enough. If you are not the cheapest supplier locally and the customer is new to you, you may be a short-term answer to the customer’s inability to pay their largest supplier. Without being paranoid, look for the reason behind the reason! You will find that if you ask a direct question ‘face to face’ with another person, you usually get near the truth.