Are your competitors’ and customers’ accounts really as good as first appears?
Every so often I am asked by a client to cast my eye over a set of accounts for them, usually that of a new or existing customer that has asked for credit, but sometimes for competitors or key suppliers. Now I appreciate that to the non-accountant, outside of the turnover, bottom line profit and balance sheet total, it can be difficult to know exactly what to look out for. As we may be basing very important decisions on the information presented, I thought it worth sharing some simple but common ways accounts can be presented to perhaps give a more flattering impression than is actually the case.
The accounting period
The period end is always obvious from the front cover, but did you know that statutory accounts can be up to 18 months long? This is not necessarily clear from first glance and an effective way of flattering results can be to extend the period up to 18 months long. The turnover figure and results may actually, say, include two busy Christmas periods which could massively flatter the turnover and bottom line. There are specific rules and restrictions on when and how often an accounting period can be extended beyond the usual 12 months so this is not a strategy companies can employ regularly, but you will have to look a bit further to find out exactly the period you are presented with. I will usually have a quick look at the accounting date of the last submitted accounts at Companies House to do this.
Single company or group accounts
Are you looking at the results of a single company or do the accounts present the results of a larger group? Have a look at the notes and see whether in fact the accounts cover just your company or actually a wider group. Particularly if you are dealing with a holding company with a common trading name you may want to make sure you know the company that perhaps you are trading with and get sight of the correct individual accounts of the actual contracting entity. These may show a very different picture.
Salary and dividends
We are probably all familiar with the term net profit and when presented with a P&L account will all look straight to this number, before and after tax, to see the trading result for the period presented. However this is not necessarily the end of the story. The results may not be quite as good as first thought. Many owner managed businesses will remunerate the owners with dividends rather than salary, which is not presented with the net profit figure in the P&L. You will need to look behind the P&L to the reserves note and where you will find the net profit after tax and the dividends. These together will give a far more truthful gauge of the results of the company.
Look out for whether the balance sheet includes a revaluation reserve. The balance sheet may be inflated by what is basically an unrealised gain on certain assets. It may be worth considering whether the company has a strong balance sheet from trading activities, usually net current asset comprising its cash and stock holding, rather than by way of revaluing its fixed assets (typically its buildings).
Certainly the above is a tiny extract of the amount of information that can be gleaned from a set of accounts, but the message is to take care in making sure that when you are presented with what seem to be good results and a strong balance sheet. It may be that not all is as it seems.Talk to Barnes Roffe today