Analysing financial statements

If you are asked to comment on the finances of a potential new customer you should download a copy of their latest financial statements from Companies House. What should you do next?

Full set needed

Whatever the filing requirements, all companies must prepare a full set of accounts for their shareholders. Therefore, if you find that your target only files abbreviated accounts, you may want to try to obtain a copy of the full accounts from them. A new customer or supplier should be willing to do this - if not, then maybe they are trying to hide something.

When Analysing Financial Statements use our interactive spreadsheet to calculate key performance indicators; these appear on Sheet 1 after you have input data from the accounts on Sheet 2.

Notes to the acounts

When analysing a full set of financial statements, it’s the notes where the most interesting information can be found. For example:

Related party note. If the company transacts with related parties, such as other companies owned by the directors, this will be disclosed in the notes together with amounts involved. You might want to research these companies too.

Reserves note. Many owner-managed companies use dividends rather than salary as remuneration. These will not usually be disclosed on the profit and loss account. The profits will also have been drawn without this remuneration having been deducted. Look at the reserves note to see what dividends have been paid. For owner-managed companies, deducting these dividends from the profit figure may give you a better indication of the company’s profitability.

Creditors’ note. It’s likely that almost a year has elapsed since the balance sheet date of the accounts you’re looking at. This means that some of the creditors that were due after more than one year in the accounts could now be current creditors. Check to see how much of the creditors figure may have become due now.

Guarantees. If the target has provided guarantees in respect of its own borrowings or those of other companies, you can find details in the notes.

Add any interesting points you discover to your analysing financial statements spreadsheet.