Why Failing to Investigate a Company’s Accounts is Risky Business

Everyone gets excited when they're about to close a deal, but you should err on the side of caution or you could end up out of pocket

Why Failing to Investigate a Company’s Accounts is Risky Business

Small businesses face many types of different risks, and it can be overwhelming to try and control them all. One that affects everyone to a varying degree is financial risk – with cash flow, late payments, poor planning, financial projections and foreign currency exchange rates among the most common issues.

Money is the lifeblood of any business so it’s vital to have proper processes in place to mitigate financial risk. This involves taking a proactive and preemptive approach so you can spot – and hopefully eliminate – any potential problems before they happen.

Where should you look

One thing you can do is research any suppliers or clients before you do business with them. It sounds common sense, but it’s something that’s often overlooked in the excitement of the moment. Stop yourself before you sign along the dotted lines and ask yourself “How much do I really know about this company?”

Looking at a business’s financial ‘health’ will give you a better understanding of how much money it has, how much profit it is making and how much debt it is in. Small businesses (which meets two of the following: an annual turnover of £10.2m or less, total assets of £5.1m or less and no more than 50 employees on average) are not required to declare their full accounts – instead they have the option to submit a simple balance sheet which gives a glimpse into their financial position. However, it is not impossible to gain a fuller picture by analysing the data, as the article here shows.

Larger firms, on the other hand, must be 100% transparent with their accounts, declaring everything from their annual turnover and assets and liabilities to net worth and director reports to Companies House.

What to look for

The most important things to pay attention to are turnover, assets, liabilities and net worth. Look at the last five years and ask yourself whether their turnover and net worth has grown at a consistent rate, year-on-year, and whether their liabilities are outweighing their assets. You don’t have to understand everything financial to draw some basic conclusions, and if alarm bells are ringing, then you should trust your instincts.

It’s also worth checking whether a business has been issued a County Court judgement before (usually for debt recovery), and whether it has a good credit rating and ‘risk score’. Credit checking websites allow you to find any UK or EU company; some offer unlimited, free access while others offer paid memberships in order to see certain data.

Ignoring potential risks – the consequences

Ignoring a business’s financials can have negative consequences; you’re more at risk of receiving late payments, or no payments at all. Company Check recently asked 500 business leaders about their experience of financial risk, and found that 68% of businesses have had to deal with late payments, while 53% of businesses have had to write off bad debts. What’s more, more than a third of firms (63%) said they do not insure themselves against financial risk should things go wrong.

The first thing that a business owed money can expect to notice is an effect on its own cash flow. It may mean that a firm has to pay its own bills late, or that it has to take out a short-term loan to cope with the loss.

If that’s not scary enough, recent statistics from the Federation of Small Businesses (FSB) found that one in four small businesses go bankrupt if the average sum outstanding grows to £50,000. That’s not a lot considering the average amount owed in late payments to UK businesses is more than £30,000.

In conclusion

The bottom line is that when it comes to financial risk, every business owner has a responsibility for managing it themselves, above anybody else. It might take a couple of hours out of your working day to do the research – but what’s that compared to thousands of pounds lost down the line?


Chloe Webber is operations director at Company Check

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