How to read Abbreviated Accounts

Turnover has not been filed. Can I estimate turnover from an abbreviated balance sheet?

Yes, you can estimate. Firstly consider the activities of the company.
For example:

  • a betting shop will have very few trade debtors.
  • a seasonal business such as selling christmas trees will have low debtors in Nov but high stocks.
  • a jeweller will have high value stock but his margins are a lot smaller.
  • a supermarket has profits of less than 3% high stock, low trade debtors and small profit margins.

Bearing this in mind before analysing, common sense tells you that a company with £250,000 of assets will have a higher turnover than a company with £25,000 of assets.

Total Assets
Total Assets are the current assets plus fixed assets and it´s relation to sales.
With a larger company the Total Assets and sales arrive at almost unity i.e. £8 billion Total Assets = £8 billion sales. This is not the case with a smaller company.
Total Assets x 2, 3 or 4 gives a very rough indication of turnover.

Trade Debtors
Most "trade debtors" pay every 70 to 90 days or 4 to 5 times a year once divided by 365 days.
So if trade debtors are £500,000 this would give an indication of sales of around £2,000,000 to £2,500,000.

Stock
There is no point in having it on the shelf or in the warehouse, so how long does the company take to shift it?
Say 60 days or 6 times a year i.e. if stock is £500,000 gives an indication of £3,000,000.

Capital Employed/Shareholders Funds
This is the Net Worth of the company.
If the current year´s Capital Employed is £445,000 and the previous year was £350,000 then the company made a profit of £95,000. It does not take into account any dividends or revaluation of assets, but these rarely appear in a UK small or medium size UK private limited company.
We now have an indication of sales and profits.

How to read company accounts and financial statements

All limited companies whether or not they are trading, must file accounts with the registrar. These are made available to the public. The most important financial statements are the balance sheet, the profit & loss account and the Director ´s report.

Balance sheet

The balance sheet is a snapshot of the company’s position.
On the top half of the balance sheet are the company´s assets (items the company owns). These are offset against the company’s liabilities (what the company owes).

Total Assets less Total Liabilities equal the net assets of the company. Current assets less current liabilities make net current assets, which is the amount available to pay bills within the year.

Issued share capital and reserves make up shareholders´ funds. These, together with any minority interests, are equal to total capital employed.

Profit and Loss account

The profit & loss account records the company´s profits or losses, and how they were reached, over the previous financial year.

At the top of the profit & loss account is turnover (or revenue), which is all of the ordinary income received by the company. Cost of sales, including production overheads, depreciation, and stock changes (stock valuation), is deducted with other expenses on a net basis from turnover. The profit & loss account will state what the total operating profit figure is. In UK accounts, the charge for tax is typically less than the pre-tax profit multiplied by the tax rate. It includes corporation tax and deferred taxation.

Corporation tax is paid on the company´s income and capital gains, usually nine months after the company´s year-end. Deferred taxation acknowledges liabilities or assets in relation to timing differences existing up to the balance sheet date. Following UK GAAP, the company will need to provide for deferred taxation on the profit & loss account only "to the extent that a liability or asset will crystallise." However, under IFRS this changes so that deferred tax is recognised on all differences between the accounting balance sheet and the tax base of the asset or liability.

Cash flow statement

The cash flow statement presents movements in cash and other assets that are similar to cash (cash equivalents). All cash flows are split between operating, investing and financing items. This is arguably the part of the accounts that investors find most useful because it is easy to understand and not impacted by subjective judgments.

The statement starts with cash flow from operating activities. It may present this in a direct way as cash received from customers, less cash paid to suppliers, employees and others.

More usually, it will present this in an indirect, more complicated way, reconciling profit before tax to operating cash flow. If so, it will start with the profit before tax, and add back depreciation, as this is not a cash flow. Any increase in debtors is subtracted as it means less cash for the company while the debts are outstanding. Any decrease in stocks or increase in creditors is added back, as it means more cash.

Net cash from operating activities on the cash flow statement will be preferably about the same as, or, better still, higher than, the operating profit on the profit & loss account.

Next comes the investing cash flows section. This includes cash flows relating to the purchase or sale of long term assets. It will also include cash payments and receipts relating to the purchase or disposal of debt or equity in other companies. Interest payments and receipts and dividends will also appear in this section.

Finally we have the financing section. These cash flows relate to the way in which the company obtains cash to finance its operations.

Chairman´s statement
It is pretty rare for a UK private limited company to produce a Chairman´s statement - if they do produce a report, it with invariably be the "Director´s Report".

Operating and financial review
The OFR provides a balanced and comprehensive view of how the company is developing, its performance, its position, and trends and factors affecting its business.

Director´s report
The Director ´s report will help you to understand the numbers, and will have some extra non-financial facts.

Statement of recognised gains and losses
This links the profit and loss account to the balance sheet.

Auditor´s report
Only required for a medium sized company with a turnover of more than £7 million.

Notes to the accounts
Watch out in particular under "Contingent Liabilities" and for changes in the method of depreciation.

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