Our latest blog comes from Beth Jackson, one half of 2 Sisters Accounting, renowned for her straightforward advice and profound industry knowledge. In the business world, not every opportunity that glitters is gold, especially when it concerns extending credit to new clients. Before you commit your hard work or resources, Beth guides you through essential checks to ensure that new business deals don’t leave you out of pocket. Dive into her expert advice on how to effectively vet potential clients and protect your financial interests, drawing on her extensive experience in managing business finances.
Quick Checks on Companies House
You've been approached by a potential client, but they've asked for credit terms or it's a big contract and something isn't quite adding up. You certainly don't want to commit to a substantial amount of work only to discover that they are not going to pay you. What checks can you conduct for a quick, inexpensive review before agreeing to work with them?
Start with Companies House; simply search their company name, and you can access a wealth of information and filed accounts. First, check if they are up to date on their submissions—any overdue filings will be highlighted in red on the front page. Good administrative practices are crucial, so this is a solid indicator of whether you might want to engage with a company.
Next, explore the 'People' tab. Are the listed directors and shareholders those you’d expect? Any surprises or names that have never been mentioned? Don’t hesitate to ask for clarification.
Then, move on to the 'Filing History' tab, where you can review everything they've submitted to Companies House. The accounts will likely be presented as micro company accounts. You can view these by simply clicking on 'View PDF'. For small companies, the filings are minimal, usually just a balance sheet. This is expected to change soon as all companies will need to publish profit and loss reports, though a final date for this requirement has not been set. However, there are some red flags to watch for.
Again, you can ask for explanations: Are these company loans for purchasing equipment that are being paid back, aiding business growth, or do they simply owe a lot of people money?
Financial Health Indicators
It's vital to scrutinise the financial health of a potential client before committing to any contractual agreements. Here’s how you can understand the financial stability of a company through its filings:
Capital and Reserves Check: Look at the 'Capital and Reserves' number on the statement of financial position. This figure should ideally be positive, indicating that the company has more assets (like cash, equipment, and receivables) than liabilities. A positive number suggests financial stability, whereas a negative figure could indicate that the company owes more than it owns, signalling potential trouble. Again you can ask them why, is it company loans to buy equipment that are being paid back and helping the business grow? Or do they just owe a lot of people a lot of money?
Examine the Notes: The notes section in the financial statements is often overlooked but can reveal crucial insights about the company's operations and obligations. For instance, the number of employees, significant financial transactions, and details of large debts can all be found here. This information can provide a clearer picture of the company's operational scale and financial commitments.
Check for Charges: Any charges registered against the company can also be found in the filings. Charges could include mortgages or loans taken against the company’s assets. A history of multiple charges might indicate a pattern of borrowing that could pose a risk to your business dealings.
Additional Safeguards
Director Histories: Another safeguard is to explore the 'People' section on Companies House. This gives you insight into the directors’ histories. Are they involved in multiple companies? Do they have a history of companies that frequently open and close? Such patterns might be red flags indicating unstable or risky business practices.
Credit Checks: Beyond Companies House, consider investing in a formal credit check if substantial credit terms are discussed. For about £30, a credit report can provide a detailed history of the company's financial behaviour, including any past issues with creditors.
Online Presence and Reviews: Lastly, assess the company’s online presence. LinkedIn profiles, customer reviews, and general activity on social media can provide further insights into the company’s reputation and operational style. Positive reviews and an active online presence can reassure you of their legitimacy and operational health.
Familiarity with Companies House isn't just for external checks—it's crucial for your own business compliance too. Ensure that all your company's information on Companies House is accurate and up-to-date. This not only helps in maintaining legal compliance but also enhances your business's credibility in the marketplace.
For any further guidance on conducting thorough client checks or if you need a detailed consultation, don’t hesitate to reach out. Protect your business by ensuring you engage with reliable clients and avoid potential financial pitfalls.
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