Why you should check company accounts before taking on new business

Chloe Webber, Company Check
- Finance - Jul 28, 2016

New business is the lifeblood of every company. The desire to find it can, at times, become all-consuming and you don’t just have to be working to targets or commission to slip into a ‘succeed-at-all-costs’ approach to winning work.

This rush to find work can easily lead businesses to take on new work before proper due diligence has been carried out. The result can be late payments, written off debts or even, in the most extreme cases, criminal activity taking place at your expense. Ironically, by trying to ‘keep the wolf from the door’, hasty companies might actually be letting a different predator in through an open window instead.

It happens more often than you might think. According to the FSB, the average amount owed in late payments to UK businesses is more than £30,000. To a small business that’s a huge amount of money which could be being used for recruitment, capital expenditure or business investment.

In fact, one in four small businesses actually go bankrupt if they were owed more than £50,000 in late payments. Its members range from sole traders to SMEs right across the country - no one is immune to the danger of rushing into a business deal too quickly. Despite this, when we recently asked some of our users about their levels of financial risk we discovered that only a quarter of them were insured against bad debts.

Company accounts - the information is at your fingertips

Checking out a company’s accounts online is easy. Every business’ accounts are filed with Companies House; small businesses which turn over less than £6.5m can file abbreviated accounts while bigger businesses file full company accounts. These are then in the public domain and available to anyone (If you’re dealing with smaller businesses, you can check their abbreviated accounts instead). Credit checking websites allow you to find any company in the UK, the EU or anywhere with digital records - you can either pay individually to download each report, or if you regularly take on new clients or suppliers then memberships give you unlimited access.

The warning signs: what and how to spot them?

Check out how many years the company’s been trading for. Age does not necessarily equal wisdom, but it’s a good early indicator if they’ve been around for decades. Compare its assets to its liabilities; if the latter is higher that the former for one year, take note. If liabilities have been higher than assets for multiple years, that’s a strong indicator that a company could have large bank loans outstanding, unmanageable wage costs or mismanagement.

Are the business directors easily accessible, and do any of them have a large number of closed or resigned directorships? Have they, or any directors they’re related to been involved in companies that are now dissolved? Of course there are many different reasons for this having happened (administration, wind up orders or voluntary liquidation etc) but it’s vital to be aware of this.

Checking out company accounts before embarking on future business deals won’t protect you completely, but it will make a big difference. It forearms you with points to raise during business negotiations where, if you don’t get satisfactory answers to your concerns and you feel the risk is too high, you can choose to walk away.

Most importantly, it keeps you aware of the dangers so you’re more likely to be alert to suspicious activity. It’s a small extra task that could help avoid big potential consequences.

Chloe Webber is operations director of Company Check

Read the July EURO 2016 issue of Business Review Europe magazine. 

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