Ignoring company law can be helpful
YESTERDAY, a researcher from a university contacted me to ask my opinion on the value of abbreviated accounts. My stance on this topic is unequivocal: accountants should advise successful SME clients to disregard statutory accounts filing requirements and file full sets of accounts at Companies House if they want to maximise access to trade credit and finance.
Perhaps I better explain. Credit scoring systems used by banks, credit agencies(like Graydon and D&B) and credit insurers rely on data to create ratings. The absence of key data suppresses credit scores. FACT.
Financial analysts, and the scorecards they produce, tend to look at 3 main families of ratios ( Performance, Liquidity and Solvency) when assessing risk. In order to calculate Pre tax profit margin, stock turnover, Creditors Days, and Days Sales Outstanding to name but a few key ratios, you need the profit and loss account.
In other words, many performance and liquidity ratios are impossible to calculate using abbreviated accounts. Without this data, credit scores are artificially lower than they could be, adversely affecting an SME’s ability to access credit to the full.
The message to accountants and their SME clients is simple: If you’ve got a good story to tell, tell it !
Financial transparency can benefit you greatly if you’ve got a good set of accounts. Abbreviated accounts leave a lot of guesswork- something that credit assessors hate because decision making is a lot tougher!!