What can you learn from a competitors Accounts?
A lot is the short answer! Considering this in more detail. If the company concerned is classed as a Medium or Large company based on EUrules, basically more than £5m of turnover and 50 employees then they need to publish a lot more information than an SME or micro business, for example a Profit and Loss account. The sorts of points to look for include:-
Profit and Loss account
- Has Turnover increased or decreased?
- Has Profit before tax increased or decreased?
- Is the company making a profit or loss?
- If the balance sheet has reduced in value from one year to the next, then either a loss has been made or the shareholders have taken more out in dividends than there was profit after tax retained.
- How much cash is there at bank?
- What is the ratio of Debtors to Creditors? This can reveal potential cash flow issues; if more is owed to suppliers than customers in turn owe the business then the company needs to trade successfully just to pay its bills.
- A change in Directors can reveal the loss of one of the founders, which may mean the entrepreneurial drive behind the business, is no longer the same.
- Change in lots of key directors may mean the business has been sold, which may lead to a change in the fortunes of the business depending on who the buyer is.
If you are based in the UK or have at least are targeting the UK market for your product or service then gaining an understanding of your competitors and their financial position is useful information. UK companies are required to publish their accounts each year, and this information is available freely via a Government website known as companies house. However that website is not very easy to navigate and you really need to dig around to find the information you need.
Cash Flow statement
Larger companies are required to publish an additional financial statement known as a Cash Flow Statement, this shows in a standard format, how much cash the business has generated and how that cash has been spent. If cash is being borrowed to fund expansion this statement will show how that funding takes place and what the debt repayments are.
A lot can be learnt from Cash Flow statements as for example a business can be successful and still run out of cash, as happened to Polly Peck PLC back in the 1980's. For this reason it is important to check regularly the financial standing of competitors and also your own suppliers, as an unexpected failure can be an opportunity for your business at the same time as a supplier failure can be a threat.
Growth or shrinkage
If a business is growing this can be a good sign of long term viability asan expanding business will be attractive as a potential acquisition target and the same time success tends to follow success in that a business that has followed a profile of successful trading for a number of years has a good chance of continued profits going forward. Likewise a business that is in trouble and hat has lost money for a number of years whilst shrinking will find it harder to turn things around, as business costs are often fixed and lower turnover then leads to deeper losses if costs are not reduced.
There are many services around which offer a monitoring service often integrated into a credit scoring service of some kind, these are useful in that they alert you to potentially interesting new information that has been filed. A step further along happens if the credit scoring outfitbuys sales ledger or Aged receivable information from debt factoring or invoice discounting services, in this case the actual amounts owing is monitored overtime, and if a company begins to slow down paying its suppliers then this early warning sign is shared via a change in credit score.
UK companies get fines if they file their accounts or annual directors information return late, this is another warning sign and often a credit opinion will drop or be suspended if information is late.
We use a variety of tools and services tomonitor company information,
wefeel this is important enough to monitor and review on a weekly basis as things are constantly changing and being prepared for threats and opportunities is important. Whilst there are paid services around, these can be expensive if the volumes of checks you need to undertake are large, and there are a growing number of freely available alternatives.