To Be able to properly comment on Company Accounts

stepbar

Well this is the story, I working in business banking. Account facilities (Overdraft, term loan etc) come up for review at least once a year. Usually I would request a set of up to date accounts from the company and confirmation tax is up to date before I start the review. I would have to comment on the set of accounts that are presented, however my knowledge of what I should be looking for is very average, im able to work my way around a balance sheet and make general comments like "Turnover has increased year on year" yada yada yada. I suppose I want to make my reviews look better and give a more realistic picture of things e.g. Like AFAIK adding back in a company's depreciation for the year is kinda of a better reflection of the total year profit, although the company will eventually be hit with the full cost of replacing the asset eventually.

Is there any other things like this that I should be looking out for?

Kinetic^

If there's a material increase/decrease in turnover/costs then see if there was any uncontrollable changes in that industry......ie. smoking ban in pubs.

Comment on gross profit as well as it's a big factor in companies. If they can't maintain a GP% that they want then there must some sort of reason as to why.

kluivert

A the old accounts review, I remember tackling that question in the leaving cert about 6 years ago now.


Start with the profit and loss and work your way through to the end of the balance sheet.

Do you use ratios in your analysis?

Liquidity Ratios
Gearing Ratios
Stock Turnover
Debtor Days
Creditor Days
Gross Profit analysis
Net Profit analysis

Examine trends by looking at the last three years accounts.

Income
Cost of Sales
Gross Profit

Main expenses
Asset replacement
Level of cash each year.
Level of long term debt.

Also look at contracts (construction companies).

The thing i think banks dont concern is the future.

If I want to borrow 250k to buy a 150k house and spend 100k renovating it the bank will value the house at 150k instead of 250k, because when your finished renovating the house its worth 250k.

I think a request for cash flow forecasts and budgets are important as well in deciding large loan request, but these forecasts should be in line with the same trend as the previous three years accounts.

Get to know GP anaylsis very well.

Start by looking at the type of work undertaken by the company.

Services or Goods

Services normal yield a higher GP level than provision of goods.

Services GP may look like this.

Sales 100000

Cost of sales

Opening Stock 0
Purchases 0
Closing Stock 0

Gross Profit 100000

GP % 100%

Provision of Goods

Sales 100000

Cost of Sales

Opening Stock 5000
Purchases 50000
Closing Stock 5000

Gross Profit 50000

GP % 50%


Lots of factors affect the GP Level.

Pricing levels for sales increased or decreased.
Price of purchases has increased or decreased.
Stock left over at the year end has increased or decreased.

The question to then ask is why have they increased or decreased.

Kinetic^

You make it sound so easy Kluivert!!!!

kluivert

Kenny 5 wrote:

You make it sound so easy Kluivert!!!!

Its part of audit planning and accessing the risk areas to cover in detail.

Something you get use to after awhile.

stepbar

Thanks for the responce, answering your questions -

Do you use ratios in your analysis?

Liquidity Ratios - NO (I tend to stay away because its can be plain as day to see if a company is doing well or not from how the account is operated) Highest / lowest balance per month, how many excess days over Overdraft limit etc, shareholder funds liquid / illiquid as per accounts etc) It is also industry dependent.

Gearing Ratios - NO (Are you talking about LTV's and the like? (not sure what the like is but anyhow ))

Stock Turnover - NO (Prob not applicable cause that sort of info would not be of major (ok in certain businesses it is) concern to us)

Debtor & Creditor Days (Slightly different use - Amount of days an account is in Debit / Credit) - Both of these are got from Bank systems

Gross Profit analysis - NOT ALWAYS
Net Profit analysis - AS ABOVE
But I do realise that both are important, and if I had more time to do a proper analysis I would. However I would need industry figures and they can take time to get. But in saying all that, in the eyes of the bank its all about repayment capacity, thats why I mentioned Depreciation; it would be added back in when determining the above. Because if you think about it after lets say 3yrs a car has depreciated by 10k, it prob will be sold and put towards a new financing loan

Examine trends by looking at the last three years accounts. - Would do this

Income
Cost of Sales
Gross Profit

Main expenses
Asset replacement
Level of cash each year.
Level of long term debt.

Also look at contracts (construction companies).

The thing i think banks dont concern is the future.

If I want to borrow 250k to buy a 150k house and spend 100k renovating it the bank will value the house at 150k instead of 250k, because when your finished renovating the house its worth 250k.

I think a request for cash flow forecasts and budgets are important as well in deciding large loan request, but these forecasts should be in line with the same trend as the previous three years accounts.

Get to know GP anaylsis very well.

Start by looking at the type of work undertaken by the company.

Services or Goods

Services normal yield a higher GP level than provision of goods.

Lots of factors affect the GP Level.

Pricing levels for sales increased or decreased.
Price of purchases has increased or decreased.
Stock left over at the year end has increased or decreased.

The question to then ask is why have they increased or decreased.
Would be au fait with all of the above

Maybe after all i'm not doing to much wrong so !!!!

Kinetic^

It's always nice to be able to add more but as you said, maybe what you're doing is sufficient.

Are you preparing it for clients or your employers? If it's your employer's then maybe you could ask them for some help.

stepbar

Kenny 5 wrote:

It's always nice to be able to add more but as you said, maybe what you're doing is sufficient.

Are you preparing it for clients or your employers? If it's your employer's then maybe you could ask them for some help.

For clients, I suppose what I was looking for was a few things to look out for e.g I'm not really sure how a company could manage to be illiquid in the accounts and still have good credit balances, not be overdrawn and manage to meet all loan repayments according to the bank a/c's?

kluivert

stepbar wrote:

For clients, I suppose what I was looking for was a few things to look out for e.g I'm not really sure how a company could manage to be illiquid in the accounts and still have good credit balances, not be overdrawn and manage to meet all loan repayments according to the bank a/c's?

Liquidity is a mesaure of how quickly the company or business can turn assets into cash in order to pay short term debts.

Currents Assets/Current Liabilities. Ratio of 2:1 is ideal. This means that the company has sufficent assets in order to pay its current liabilites.

Ratio of 1:1 would suggest that the company might meet with trading difficulties should they fail to improve there liquidity position.

Kinetic^

It does however all depend on the industry so a 2:1 might seem normal for one industry and could be very bad for another. Stepbar you seem to have the accounting jibberish all correct, maybe if you looked into the specific industries it would enable more jibberish

stepbar

Kenny 5 wrote:

It does however all depend on the industry so a 2:1 might seem normal for one industry and could be very bad for another. Stepbar you seem to have the accounting jibberish all correct, maybe if you looked into the specific industries it would enable more jibberish

You're telling me Thats why I did strategy and not accounting.... strategy = big picture, accountancy = the numbers. Now if you could combine both, you would be in business. That being said the numbers are important but it as far as I am concerned its more about the potential. Thats what im looking at anyhow.

Thanks for the tips so far lads.

Kinetic^

I'm hurt stepbar.......accountancy is not just about the numbers, so much more to it but I guess you'll never know :mad:

stepbar

Kenny 5 wrote:

I'm hurt stepbar.......accountancy is not just about the numbers, so much more to it but I guess you'll never know :mad:

Yeah rite.....:D

kluivert

Step bar,

You need to understand the numbers in order to develop a correct strategy to implement.

Thats why accountants are masters of strategy.

Strategy is an exam in the accounting finals as well did you know...:D

stepbar

stepbar wrote:

You're telling me Thats why I did strategy and not accounting.... strategy = big picture, accountancy = the numbers. Now if you could combine both, you would be in business. That being said the numbers are important but it as far as I am concerned its more about the potential. Thats what im looking at anyhow.

Thanks for the tips so far lads.

<AHEM> I dont disagree with you

Kinetic^

That's alright then, carry on!!!