When you file your accounts, how much do you know about how they will be interpreted by the companies that analyse such data and, in many cases, add their own interpretation?
What do outsiders think of your company? What are they basing that view on? I’m not talking about how quickly you pay suppliers or how you are seen by your neighbours.
What I’m referring to is information about your business that can be obtained by anybody.
One of my clients recently obtained such information about the company he jointly owns.
He was looking to add another firm to the group and when searching the internet for available names had his curiosity aroused by an advert for “full financial and commercial information” from the company sitting at the top of his search results.
He inputted the company name, paid £30 and downloaded a ten-page report. It was far from comforting.
Under the banner “Important Headlines” it said: “Please note that companies of this age have historically proven to be more at risk of insolvency than longer established companies.”
While the statement is factually correct, to make such a comment on a company that is seven years old and has made a profit from year one is hardly balanced.
It continued: “The company operates in a sector which has historically generated a much higher rate of insolvency relative to the total population.”
Again (probably) factually correct – they are in manufacturing which has hardly had the best record in the UK over the past ten years – but there is no mention of actual performance or balances.
It went on to note £700,000 of net assets and more than £500,000 of cash, but it failed to make any judgment on this.
Furthermore, there was no comment on the fact that the current ratio and the liquidity ratio were nearly double their norm for those companies in what was described as the “upper industry average” (a sample of nearly 1,000).
There was a distinct lack of data on my client. This was because he had taken advantage of the right to file only abbreviated accounts.
Given the successful financial history of the company, perhaps this was a bad call on my part. Perhaps more strong data would result in a better profile – although I suspect it would do little to avoid the mechanical analysis.
The report appears to have been produced by rigid computer analysis with no manual intervention. At least it concludes “normal” risk. But I wonder how good the numbers would have to be for the highest “confidence” risk score to be achieved.
It would be tempting to say that this really doesn’t matter. My client has an established group of customers and suppliers. The company has never had a problem getting normal trade credit and, as suppliers are always paid on time, it can get trade references easily.
My concern is for the vast majority of companies that are not as strong. How damning are the reports on them? Do they realise what has been written about them by these mindless computers?
Critically, how much notice is being taken of those reports? What decisions are being made as a result? Many companies will not have the financial expertise to look a little deeper and understand what might lie beneath – both positive and negative.
I strongly advise all FDs to pay the few pounds and get reports on your companies. While I suspect there is little redress available if you think the conclusions are flawed, at least you are informed.
Like my client, you might also think about filing more information with Companies House to present a better picture.