How To Understand Abbreviated Accounts

What an exciting title for a post I hear you cry!

Well, if like me on a lazy Sunday afternoon with nothing to do you find yourself investigating companies and their performance over recent years then this might be for you.  If you’re just interested in how to read a small companies abbreviated accounts, this is also for you:)

So, abbreviated accounts are the accounts annually filed at Companies House for any small business in the UK.  A small business is defined as one which has either of at least two of these options:

  1. Has no more than 50 employees or
  2. Turns over £6.5 million or less or
  3. Has assets of less than £3.26 million

To make this easier, we’re going to need a balance sheet.  Here is one from companies house and we’ll call the company ‘Co X’

Item 2014 2015 % Difference
Current Assets £50,000 £65,000 30%
Debtors £30,000 £35,000 17%
Creditors £20,000 £25,000 25%
Cash £5,000 £7,500 50%
Fixed Assets £2,000 £2,000 0%
Net Assets £30,000 £40,000 33%
Share Capital £1 £1 0%
Profit / Loss Revserves £13,235 £17,889 35%
Share Holder Funds £13,236 £17,890 35%

First and foremost, how to work out profit? By deducting the Profit / Loss Reserve 2014 from 2015 we get our profit for 2015.  So, £17,889 – £13,235 = £4,654 profit for 2015.  The P&L reserves is the Net Cash the co has after any shareholder dividends.

Debtors is the money owed to the business from customers. We can see the debtor total has moved up by 17%.  One can assume sales have increased (assuming prices have not changed and / or the product mix is also the same for both years).

Its possible from the debtors  numbers to estimate annual sales although you’ll need to make some assumptions.  Lets assume the customer has a 90 day payment term.  We can thus assume the amount £35,000 is 90 days worth of sales.  We can assume the same for the previous year to assuming payment terms are the same so, if we divide both years by 90 we can get sales per day.  On this basis we can assume annual sales for 2014 are £121,666 and for 2015 £141,944.  This represents a 16.6% rise in annual turnover.

Of course, there are many assumptions here but its at least an indicator.

We can apply the same methodology for outgoings by using the Creditors numbers.  So outgoings in 2014 were £81,111 and in 2015 £101,388, a 25% increase year on year.

We now have the income and out-ogings per year.  This allows us to work out the profit:

Item 2014 2015
Income £121,666 £141,944
Out-goings £81,111 £101,388
Difference £40,555 £40,556
Profit % 33% 29%

It’s worth remembering there are loads of assumptions here such as the same payment terms every year, price stability, product stability etc but being able to decipher some basics might give an insight into these type of accounts.

Hope this is helpful.  Just like me, you can now spend time looking over company accounts and trying to work out whats going on.  OK, maybe not:)

 

 

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