Home > Uncategorized > Beyond the balance sheet…

Beyond the balance sheet…

One of my best clients is a firm of lawyers who ask me to look closer at credit reports and accounts for businesses they are considering taking action against. Rightly they consider part of their service to their clients is to advise whether an expensive action is worthwhile

You may well ask why this is necessary with a credit report to hand. Surely the agencies provide the information you require?

The answer to that is sometimes yes, sometimes no. Most reports are a simple interpretation of ratios on a balance sheet, with some additional legal stuff. The key is to look behind the figures

A recent simple example was a hotel that owed a considerable sum. The report considered the busiess to be “even”. Fair enough but look closer and we see that was based on the current liablities more or less matching the fixed assets. The hotel didnt own the building so it is fairly safe to assume that these assets were fixtures and fittings. Now we had a problem…

Clearly if this was the case, the realisable value of some fitted bathrooms and reception furniture would be…. zero

Was that the end of story? Well it was worth looking a little closer. How was the business performing? How do we find that out?

The answer is Trip Advisor. If you dont know already, this is an extensive site giving users reviews of Hotels. And you can now perhaps imagine what we found. “worst hotel in london” “rude staff” “dirty” etc etc. Needless to say this was not a business going places.

A little further investiagtion found that the property was also on the market. So we now had a clear picture

The credit report said “even risk”. My conclusion? I think you can guess, but once again the value of wide ranging in depth credit assessment was proven. There is always a story beyond the balance sheet

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Categories: Uncategorized
  1. June 18, 2011 at 5:17 pm

    I could not agree more Clive, credit reports normally from bankers, do not properly reflect the ability or willingness of a business to pay. Or any assets that enforcement of judgments could use as leverage for payment.
    It always makes me laugh that Barclays bank has a ‘Very good Credit worthy’ credit score, up around 85%. Yet they also have piles and piles of unsatisfied county court judgments that they are simply ignoring, which shows that they are a very bad payer, paying only when they choose.

  2. June 21, 2011 at 10:07 am

    Hi Stephen. I suppose that ultimately the credit assessment is about the businesses ultimate ability to pay rather than its on going habits. Yes, the business you name has a shocking record (have had experience of that myself) but its a good point you raise in so far as there is possibly a case for parallel credit ratings based on strength on one hand and attitude to suppliers on the other. Although the two are often linked, its not always the case. I could cite further examples. I think you have given me an idea for a further post…

  3. Ron B
    June 23, 2011 at 5:09 pm

    I use credit reports as a quick reference guide and in some cases it gives me exactly what I want to know. However…. Always in conjunction with other information. As far as figures on the sheet are concerned. What about value of stock. I commented to one potential supplier that the majority of their asset was product and that if the company did suffer the indignity to failure the likely return on the value would be around 15% – 20% (not always the case I agree) but in this case that was pretty accurate. That being the case the company would have had a shortfall of around £2m. This is just a very quick response to a subject I could bang on about for hours.. The numbers are not the bee and end all. You have to know more about your clients business than you think if you want to remain safe.

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