Abbreviated accounts are submitted by small businesses with a turnover under £10.2 million. Abbreviated accounts are used to provide highlights of the company’s full accounts but because these businesses are still relatively small, they are not required to submit full accounts to Companies House.
Businesses that want to protect themselves against financial risk use the accounts of a company to better understand their financial position. While services like Company Check do provide all available accounts, when accounts are abbreviated, only the abbreviated version can be shown.
This can be frustrating as it prevents you from gaining a full picture of the companies you’re doing business with or looking to do business with in the future. Or does it? Here, Nick Chowdrey, technical writer at Crunch (a financial accounting platform for businesses) explains how to investigate a company using abbreviated accounts.
Who submits abbreviated accounts?
Abbreviated accounts are submitted by ‘small businesses’. A company qualifies as small if it meets at least two of the three following criteria:
- annual turnover of £10.2 million or less
- Balance sheet total of £5.1 million or less
- no more than 50 employees on average
Companies classed as ‘small businesses’ are:
- allowed to send shorter (‘abbreviated’) accounts to Companies House – this means less information about your company will be publicly available
- not required to be audited
- not required to file a copy of the director’s report
Whereas larger firms must be 100% transparent with their accounts – providing details on profits and losses, as well as detailed explanatory notes – a small business are given the option to submit no more than a simple balance sheet.
How to identify an abbreviated balance sheet
Abbreviated accounts are just that; an abbreviated version of the full accounts of a company, presented to give the highlights from the full report. If you’re looking at an abbreviated balance sheet, you’ll know immediately because it will be missing elements such as:
There will be zeros in the balance sheet and many of the figures you’d expect to see won’t be there.
Sherlock vs. the abbreviated balance sheet
Small businesses can take advantage of submitting abbreviated accounts to prevent their competitors or other interested parties from learning too much about their business. Despite being shortened accounts, there are still lots of things that you can learn by analysing the data.
As an example, here’s a mocked up balance sheet:
|Profit and loss reserves||£16,098||£14,451|
The profit and loss reserve figures show us the total net amount of cash the company has to date, less any funds distributed to shareholders as dividends. The figure for 2013 (£16,099) minus the figure for 2012 (£14,451) equals £1,648 profit for that year.
Sometimes the profit and loss reserves figures will also include the amount of dividends issued by the company. If this is the case, the figure will include this amount, with the portion of the total that were dividends in brackets. In this example, if £40,000 were issued in dividends, the profit and loss reserves figures would look like this:
|Profit and loss reserves||£16,098||£14,451|
You’ll just have to subtract the number outside of brackets from the number inside to get profits after dividends.
Imagine the profit and loss reserve figures in the main table were negative instead of positive. You can use the same method to calculate the amount of losses for the year:
**-£16,099 – -£14,451 = -£1,648**
Note also that because a loss making company can’t issue dividends, you can very closely estimate the total loss for the year as £1,648.
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.
If the terms state that customers have 30 days in which to pay, we can assume for our above 2013 figures that £20,747 represents 30 days of sales. Divide one by the other and multiply by 365 to get an annual sales estimate:
**£20,747 / 30 = £691.56 in sales per day.**
**£691.56 x 365 = £252,421.40 turnover per year.**
In this example, the company has exceeded the VAT threshold of £79,000 turnover per year, so to find out how much the company made after VAT, just divide by 1.2 giving £210,351.16 in this case. 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.
If we do the above calculation for the 2012 figures we come up with £161,441.52 turnover before VAT – that’s an increase of £48,909.64 in 2013. Divide this by the 2012 figure and multiply by 100 to get a percentage sales growth for the year:
**£48,909.64 / £161,441.52 x 100 = 30.2% sales growth.**
The creditors figure can be used to work out how much money the company owes to suppliers. 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 nclude any loans taken by the company, which will skew the results. Using the figures after VAT and assuming suppliers are paid on 30 day terms, for 2013 we can estimate outgoings like this:
£12,483 / 30 = £416.10 in outgoings per day. £416.10 x 365 = £151,876.50 annual outgoings.
We can then work out a profit margin percentage by finding the difference between sales and outgoings, then multiplying by 100:
**£210,351.16 – £151,876.50 = £58,474.66 profit.**
**£58,474.66 / £151,876.50 x 100 = 38.5% profit margin.**
The same can be done to work out a 86.9% profit margin for 2012, meaning that although total revenue did increase in 2013, profitability actually decreased by a very significant 48.4%.
In this example, we can see that the company’s bank balance (cash) increased by £2,204. This could infer that the company is spending less money or invoicing more clients.
However, if you look at the creditors figure, you can see this has gone up by quite a lot too, so it could just mean that the extra cash is money owed to others. The share capital figure can be used to infer that there is only one shareholder. This could mean that the company is a personal service limited liability company, with no employees. Equally though, it could mean that the business has employees, but has been set up by a single entrepreneur who acted alone to found the company.
Unfortunately, it is impossible to tell which from abbreviated accounts alone. Consider that a company with higher revenue is more likely to be able to afford employees.
Changes in the law – abridged accounts
The Companies, Partnerships and Groups (Accounts and Reports) Regulations 2015 came into force on April 6 2015, implementing the requirements of the new EU Accounting Directive. The regulations state: “For accounting periods that begin or after 1 January 2016 small or medium-sized companies can’t file abbreviated accounts with us any more. The very smallest companies can prepare micro entity accounts, while other small companies can prepare a set of abridged accounts for their members, which can also be filed with us.
“However, this does not mean that all small companies are now required to file full accounts, the very smallest companies may disclose less information by preparing micro-entity accounts. Other small companies may, instead of filing full accounts, choose to prepare a set of abridged accounts for their members and then file these with us.
“Abridged accounts contain a reduced set of information when compared to full accounts and the filing requirements for small company abridged accounts and the relevant balance sheet formats can be found in the Small Companies and Groups (Accounts and Directors’ Report) Regulations 2008 as amended by the Companies, Partnerships and Groups (Accounts and Reports) Regulations 2015.”
This means that from December 2016, all small businesses will adhere to these new regulations.
Why should you investigate a company’s accounts?
There are various reasons to investigate a company’s accounts. These include:
- Identifying risks prior to working with a new supplier or client
- Exploring the opportunity of a new prospect from a business development perspective
- Monitoring the financial security of businesses you do business with
- Protecting your own business against financial risk
How to access company accounts
You can access company accounts, both abbreviated and full, using Company Check. Simply type in the name of the company you’d like to investigate and you’ll be taken to a page showing you a range of information about that business, including all of their submitted accounts under the tab marked ‘accounts’. You can also see the credit risk associated with that business and key financial data in the tab marked ‘summary’.
Whether you’re exploring a new business relationship or protecting your business in existing relationships, it’s important to monitor and understand the financial health of the companies with which you work. Sign up for a pro account on Company Check today and you’ll be able to create your own dashboard to follow companies and receive alerts as soon as things change.