Keeping good company: financial risk assessments


“In God we trust, all others pay cash.” The famous line, first used by the Philadelphia Inquirer in 1877, makes a valid point - how can a business ensure that it’s going to get paid? Fortunately, creditors of Bedworth Haulage picked up on rumours of trouble at the company in the weeks before it entered administration in February.

As reported by CM at the time, AD Boyes Haulage Logistics clawed back most of the £4,000 it was owed before the administration. Others may not have been so lucky. Delayed payments are much harder to recover when a customer operates via a corporate shell.

Unless there are personal guarantees, or wrongful trading or fraud can be proved, the debts of an entity stand distinct from the assets of the individual. In exchange for this protection, incorporated entities must put certain information, including company accounts, into the public domain.

Peter Windatt, a director of BRI Business Recovery and Insolvency, notes that company accounts are simply a record of trading activity and, he says, in practical terms the basics of accountancy are the same for all businesses. “Differences arise when assets are acquired through different mechanisms such as by lease, contact hire, and lease purchase, and when assets are sold using different methods such as sale or return, consignment stock, sale and leaseback,” he says. Each is treated differently for accounting purposes.

It is for this reason, he says, that accounts “enable an informed user to form a view as to the performance of a company over a period of time through the profit and loss account, and to form a view as to its solvency at a given moment in time via a snapshot of the balance sheet that at, its simplest, lists assets against liabilities”. While accounts can help form an opinion, they are not required to look into the future.

“Detailed reports and accounts for a PLC will differ greatly from a small one-man band as the disclosure requirements get more onerous the bigger a company becomes”, says Windatt. “For the average company there are no significant future-gazing requirements.”

Accounts should therefore be read with a pinch of salt, says Stephen Diver, manager, financial reporting advisory group at Grant Thornton UK LLP. “It is possible to review trends in a set of accounts, as typically two years of information is disclosed, and previous statutory accounts may be downloaded from Companies House.”

Diver says that when assessing trends it is important to read all information in the statutory accounts, for example a one-off event could lead to a significant profit or loss in a single period. This would not be indicative of future performance and should be disclosed in the directors’ report in the accounts.

As to what else an operator should be looking for, this will vary greatly with the nature of the business being considered. Windatt says: “Being able to analyse one company in a sector against others from the same sector is much more useful than comparing a company to all companies.”

Something else to consider, says Diver: “Abridged accounts will not include a profit and loss account. As such, performance may be more difficult to assess for smaller companies.”

He says an alternative is to calculate the movement in retained earnings between the two years disclosed, because in most instances this will equal the profit or loss for the company. However, as other items may be included in this movement, it is not an exact measure.

Accounts can highlight large creditor balances. Could it be a problem for a debtor company? Maybe, but only when a large creditor believes it to be so.

For others the problem will only become apparent when there is an action to wind up the company; debts above £750 and a company that does not have the cash to pay can be cut down.

A legal definition of insolvency is found in section 123 of the Insolvency Act - either assets are exceeded by liabilities, including contingent and prospective; and/or the company is unable to pay debts as and when they fall due.

Fundamentally, says Windatt, the adage turnover is vanity, profit is sanity and cash is reality is not too far from the truth; “anyone can sell at a loss - profit is good on paper, but not a sign that you will survive if you can’t get the cash in from those who owe you”.

Accounts are just part of the story as firms should know what type of business they are dealing with - a sole trader, partnership or some form of limited company. Windatt says: “Don’t be reassured that a firm’s accounts say it is ‘part of the XYZ group’ because that only means it is a kite, which, if it doesn’t fly as it might like, it can cut the string on and watch it fall with little damage to themselves.”

He also says to look for the obvious such as too many round figures. “Look for a sudden change in something; anything. See if debtor days are rising: they are selling but not getting paid.

Do the same for creditor days: purchases are not being paid for. Also, look for changes in the board room, remembering that some firms might not record changes at Companies House, which is riskier still.”

Diver advises looking at gross margins (profit) levels driven by cost savings; fully depreciated fixed assets that need replacing soon; loans that need repaying within 12 months and whether the business has the money to do so.

And see if there are any related parties that have loaned sums to the business or if any sales or costs are associated with them. “It is important to look for consistent losses, particularly if accompanied by a declining trend.

“An increase in liabilities may not be an issue if this is to fund, for example, capital expenditure but it’s likely to be a concern if funding losses,” Diver says.

In some cases, the directors’ report might provide some insight into the reasons for losses or increases in liabilities. A quick search at Companies House will show a variety of forms of company accounts - some long, some short.

Should a short set of accounts be viewed with suspicion? Windatt thinks not: “If directors are acting wrongly, they won’t file accounts or will make them up and wait for someone to catch up with them.”

Remember, Companies House is just a repository of information, it does not fact check. With accounts it is important to take a nuanced view as risk is a function of doing business on credit. Do your homework, take an informed view, and then do what you think is likely to be for the best.

By Adam Bernstein

Tribunal trouble: unfair dismissal and employment tribunals

Employment tribunal

According to Ministry of Justice statistics, single employment claims rose by 90% in the final quarter of 2017 compared with the same quarter the previous year. This increase follows the abolition of employment tribunal fees in July 2017.

Employees feel more empowered than ever to bring claims against employers now that they do not have the financial restraints they once had. But what does this mean to an employer and how can an employment tribunal claim against a company be avoided?

One of the most common reasons employment tribunals arise is dismissing an employee without a fair reason to do so, or if correct procedures and processes when dealing with a disciplinary or redundancy were not followed.

According to the government, a dismissal can be deemed unfair and challenged at tribunal if it comes after an employee: asks for flexible working arrangements; has resigned and given the correct notice period; joined a trade union; has taken part in legal industrial action for a maximum of 12 weeks; applied for maternity, paternity or adoption leave; exposed wrongdoing (also known as whistleblowing); needed to take time off work to attend jury service; or refused to give up their rights such as breaks.

Fair reasons for dismissing an employee include: if it is in the best interests of the business; if the employee is subject to a restriction that prevents him/her from carrying out the work he/she is employed to do (for example if a driver receives a driving ban as a result of breaking the law); if the employee has a long-term or persistent illness that has made it impossible for him/her to continue doing the job after receiving reasonable time to recover and looking at ways of supporting their return to work; if they are unable to do their job properly (for example, not being able to keep up with changes or unable to get along with other employees).

It is crucial that when dismissing employees for any of the aforementioned reasons employers follow the correct procedures and guidance as set out by Acas to avoid claims being made against the organisation. Sometimes employers have no choice but to make redundancies. This is never an easy choice but if there are no alternative options employers must ensure procedures are carried out correctly to maintain reputation.

If redundancies are handled incorrectly it can lead to an employment tribunal claim. Legal requirements must be adhered to and considered when making redundancies, including choosing the employees to be dismissed and how to handle the consultation process, to avoid claims of unfair dismissal or discrimination.

Employees are protected under the Equality Act 2010 and should be treated fairly. If an employer is found to be in breach of the law it could find itself at the centre of a discrimination claim at an employment tribunal.

The law states that individuals are considered discriminated against if it can be proven that the unfair act to which they were subject to was because of one or more of the following characteristics: their age; gender; race; sexual orientation; marital status; pregnancy or maternity; gender reassignment; religious beliefs; and/or disability.

If an employee feels they have been treated less favourably at work than another colleague due to a protected characteristic they may make a claim to the employment tribunal. So it is important to ensure reasonable adjustments are made to allow an employee with a protected characteristic to be treated as equal to their colleagues.

For example, employers might consider altering premises as far as is reasonably possible to allow the accessibility for a disabled employee to be as close to the standard as enjoyed by other employees without a disability. Failure to make reasonable adjustments could lead to a discrimination claim.

Compensation awards for discrimination claims are unlimited, so if a claim was lost employers could face a heavy financial penalty, depending on the severity of the alleged discriminatory behaviour or conduct. Disputes with an employee over wage payments could also lead to an employment tribunal claim if it cannot be resolved in the workplace.

To avoid such disputes ensure contracts of employment are up to date and signed by both parties. Contracts should include details of employee wages, holiday entitlement and hours of work and can be referred to if a dispute arises. They are important in ensuring employers are compliant should a complaint be made against it at an employment tribunal.

By Philip Richardson

Philip Richardson is partner and head of employment law at Stephensons. Tel: 01942 774192