very little cash in published accounts

[ds666]

I often read company accounts of potential customers etc . It is quite common to find accounts where the year end cash position is very small relative to the debtor and creditor amounts in the accounts e.g. d and c's of several hundred k but , say , less than £10k cash . . Can someone explain how these companies trade ??

[Eric Mc]

Efficient use of credit?

[Ziplobb]

they run on an overdraft ?

[BlackTails]

With tight liquidity.

[anonymous-user]

They could be linked with another company which could be where the majority of their cash is being reported, and so the figure you see in their abbr accounts isn't properly reflecting the cash on hand they use to run their business?

[anonymous-user]

Statutory accounts for small companies don't really tell you a great deal, they're just a snapshot in time and the money could be anywhere (or nowhere). It gets even more difficult when there's a web of corporate ownership all in the small company regime.

[Countdown]

ds666 said:

I often read company accounts of potential customers etc . It is quite common to find accounts where the year end cash position is very small relative to the debtor and creditor amounts in the accounts e.g. d and c's of several hundred k but , say , less than £10k cash . . Can someone explain how these companies trade ??

One thing to look at is the opening cash balance and the closing cash balance. If there's a steep drop that would throw up some warning signals.

[2 sMoKiN bArReLs]

I've worked for several companies over the years that struggled with cash. As said, get 90 day terms from your suppliers and get 30 days with your customers.

[Simpo Two]

ds666 said:

I often read company accounts of potential customers etc . It is quite common to find accounts where the year end cash position is very small relative to the debtor and creditor amounts in the accounts e.g. d and c's of several hundred k but , say , less than £10k cash . . Can someone explain how these companies trade ??

I'd suggest inadequate margins and poor credit control. It would frighten me because one failure could mean bye-bye business. 'Just in time' may be great for baked beans but not for money beans!

[Countdown]

Simpo Two said:

I'd suggest inadequate margins and poor credit control. It would frighten me because one failure could mean bye-bye business. 'Just in time' may be great for baked beans but not for money beans!

Margins aren’t connected to cash balances. Poor credit control may be an issue but (as mentioned above) comparing opening and closing cash balances (to calculate cashflow) would show how good or bad credit control was.

Calculating the “Quick” ratio would be an easy way of seeing if liquidity is a problem.

[2 sMoKiN bArReLs]

Countdown said:

Simpo Two said:

I'd suggest inadequate margins and poor credit control. It would frighten me because one failure could mean bye-bye business. 'Just in time' may be great for baked beans but not for money beans!

Margins aren’t connected to cash balances. Poor credit control may be an issue but (as mentioned above) comparing opening and closing cash balances (to calculate cashflow) would show how good or bad credit control was.

Calculating the “Quick” ratio would be an easy way of seeing if liquidity is a problem.

Maybe. I've worked in companies with no real cash that showed healthy balances at the year end snap shot, and vice versa.

[Simpo Two]

Countdown said:

Simpo Two said:

I'd suggest inadequate margins and poor credit control. It would frighten me because one failure could mean bye-bye business. 'Just in time' may be great for baked beans but not for money beans!

Margins aren’t connected to cash balances.

Making more profit per job would mean they had more money. I wouldn't be happy with big debts but only buttons in the bank, hoping every day is going to bring that vital payment. It depends what the business is of course, but I think the difference between 'smart' and 'oh st' can be small and sudden.

[Eric Mc]

Simpo Two said:

Making more profit per job would mean they had more money.

But not necessarily in the form of large cash balances. Keeping large amounts of cash is not always the cleverest thing to do in business. If you are in the lucky position to have large cash surpluses available to you, you might want to make better use of that cash than just having it sitting in a bank account somewhere.

[Countdown]

Eric Mc said:

Simpo Two said:

Making more profit per job would mean they had more money.

But not necessarily in the form of large cash balances.
.

Indeed. The amount of cash sitting in the bank account at year-end (or any point in the year) bears zero relationship to profitability. If I bought a banana for £1 and sold it for £1bn I would have made £999,999,999 profit. But, until the buyer actually PAYS me, my cash balance will be an overdraft of £1. And even after the buyer pays me my cash balance might still only be £1 if I take the whole lot out in dividends. So “profit per banana sale” doesn’t mean more money in the bank at year end.

The Cash figure on the balance sheet (on its own) is irrelevant to how successful or not a business is. There are other, better, indicators e.g. net assets, GP ratio, OP ratio, Quick ratio, positive cashflow, gearing.....

[Jockman]

Countdown said:

The Cash figure on the balance sheet (on its own) is irrelevant to how successful or not a business is. There are other, better, indicators e.g. net assets, GP ratio, OP ratio, Quick ratio, positive cashflow, gearing.....

Yup, but impossible to achieve all this just from a balance sheet.

[Eric Mc]

Jockman said:

Yup, but impossible to achieve all this just from a balance sheet.

Depends on the details shown on the balance sheet. STATUTORY balance sheets for small companies as filed at Companies House certainly don't contain enough details. But you may be able to get access to a more detailed version.

[Jockman]

Eric Mc said:

Jockman said:

Yup, but impossible to achieve all this just from a balance sheet.

Depends on the details shown on the balance sheet. STATUTORY balance sheets for small companies as filed at Companies House certainly don't contain enough details. But you may be able to get access to a more detailed version.

Any pointers, Eric?

[PMacanGTS]

EddieSteadyGo said:

They could be linked with another company which could be where the majority of their cash is being reported, and so the figure you see in their abbr accounts isn't properly reflecting the cash on hand they use to run their business?

This. It’s always a good idea to look at the structure, to see if cash in the form of dividends, are being moved up to a parent.

[2 sMoKiN bArReLs]

The simple truth is that you can't tell very much from statutory accounts. You really can't.

[Countdown]

Jockman said:

Countdown said:

The Cash figure on the balance sheet (on its own) is irrelevant to how successful or not a business is. There are other, better, indicators e.g. net assets, GP ratio, OP ratio, Quick ratio, positive cashflow, gearing.....

Yup, but impossible to achieve all this just from a balance sheet.

You'd be able to work them all out apart from the positive cashflow, and you could have a good stab at the cashflow (as long as you had prior year comparators, using the indirect method)