Which discrimination should trump which discrimination?

Hotblack Desiato

Well, if you even bothered to read the post you replied to, it doesn't appear you understood it.

smacl

Hotblack Desiato wrote: »

Well, if you even bothered to read the post you replied to, it doesn't appear you understood it.

+1. Retained profit isn't net profit. If I make a decent profit in any given year that doesn't need to be in the company I'll chuck it into my pension fund or take it out as a dividend. If however I think I'll need the money, e.g. to take on more staff or buy new equipment I'll leave it in the company. Similarly, if I'm thinking of selling the company, I leave the money in the company to make it appear cash rich. A two year old abbreviated balance sheet for a small company doesn't tell you that much, and you'd do well to get anything more recent.

Peregrinus

recedite wrote: »

The link above does not work BTW. I agree there is no point digging any further unless you are a mole (and there are no moles in Ireland).
The principle of Occam's Razor, however, would suggest that if a company is able to accumulate and retain more profits than in the previous year, then it is doing well.

We don't know that it accumulated and retained more profit than in the previous year. We know how much profit it retained in 2015/6 (about 170k) but not how much it retained in 2014/5.

And, as already pointed out by me and others, even if we did know that, and the 2015/6 figure was larger, that wouldn't tell us that the business was more profitable than in the previous year. Just that it was, for whatever reason, retaining more profits, which is a very different thing.

recedite

Peregrinus wrote: »

We don't know that it accumulated and retained more profit than in the previous year. We know how much profit it retained in 2015/6 (about 170k) but not how much it retained in 2014/5.

And, as already pointed out by me and others, even if we did know that, and the 2015/6 figure was larger, that wouldn't tell us that the business was more profitable than in the previous year. Just that it was, for whatever reason, retaining more profits, which is a very different thing.

Yes, you are correct. And yes, there is a tiny chance that the business is not doing well, despite accumulating even more profit. It could be that the whole family have been living on baked beans for the year, just so they could show people that the family business has even more money in the bank than it had last year. There is always that tiny chance.
Hang onto it, my friend

Peregrinus

Stop digging, Rec.

What we know about this business is that it retained profits of 170k in 2015/6. Is that "doing well"? We've no idea. We don't know what the gross profits in 2015/6 were, or the net profits. We don't know what the return on investment was. Is it higher than the Macarthurs would get by putting their cash in the post office? Lower? Search me. We don't know what the turnover is, so we don't know what the profit margin is. 2%? 15%? We've no idea We don't even know whether retained profits are rising or falling from year to year. For all we know, 170k in retained profits could represent a steep decline.

Generally, when you don't know something, it's best to acknowledge that you don't know it. (I really shouldn't have to point that out on a forum dedicated to atheism and agnosticism .)

Hotblack Desiato

Is the business actually a limited company? If so, it's ridiculous that they can get away with returning such sketchy information.

The purpose of a companies register and publishing accounts is supposed to be so would-be creditors can assess whether they're likely to be paid. If you can't really tell whether a business is making money or not, they might as well not bother publishing accounts at all.

Peregrinus

Hotblack Desiato wrote: »

Is the business actually a limited company? If so, it's ridiculous that they can get away with returning such sketchy information.

The purpose of a companies register and publishing accounts is supposed to be so would-be creditors can assess whether they're likely to be paid. If you can't really tell whether a business is making money or not, they might as well not bother publishing accounts at all.

Yes, it's a limited company.

The point of disclosing accounts is so that those considering dealing with the company will know if there are assets against which they could enforce a judgment, and what other liabilities the company has that might also have to be satisfied out of the same assets. For that purpose profitability is irrelevant; the balance sheet is what matters. Hence that's what you have to disclose.

If you're considering lending to the company you're concerned about the company's ability to service the loan, and you want to know about cash-flow and profitability and suchlike. But a loan is something that arises by agreement. So for that you don't need to have full accounts lodged in public at the Companies Registration Office; you just ask the company to show you its full audited accounts, and it does, because it wants the loan.

smacl

Hotblack Desiato wrote: »

The purpose of a companies register and publishing accounts is supposed to be so would-be creditors can assess whether they're likely to be paid. If you can't really tell whether a business is making money or not, they might as well not bother publishing accounts at all.

If you're going to do credit check on a company, you'd be looking at a lot more than the abbreviated balance sheet. e.g. list of directors, actions against the company, other directorships held by the directors, actions against those companies etc.. You would also typically ask the company for other current financial references prior to extending them credit. Many small company overdrafts for example require a joint and several guarantee from all the directors.

Retained profits can also be counter-intuitive as they will often be significantly down after a period of growth, where retained money has been expended by investing in new salaries.

Hotblack Desiato

Peregrinus wrote: »

If you're considering lending to the company you're concerned about the company's ability to service the loan, and you want to know about cash-flow and profitability and suchlike.

Every supplier is a lender, up until they get paid.

Nobody wants to have to go down the court route.

smacl

Hotblack Desiato wrote: »

Every supplier is a lender, up until they get paid.

Nobody wants to have to go down the court route.

Bad debts tend to be a common part of small business in this country, and I'd guess every small business that has survived one or more recessions has dealt with this. Keeping retained earnings in the company is also a way of being able to copy with this, along with simply not offering credit to clients you don't like the look of.

Peregrinus

Hotblack Desiato wrote: »

Every supplier is a lender, up until they get paid.

Nobody wants to have to go down the court route.

Nobody wants to have to, but the point of disclosing the balance sheet is so that you'll have relevant information about what the state of affairs might be if you do have to.

The basic deal with limited liablity is: Persons dealing with the business can only enforce their claims against the assets of the business, and not against the assets of the owners of the business (the shareholders). In return for which, persons dealing with the business are entitled to know what the assets of the business are. Hence, the balance sheet.

Obviously persons dealing with the business might be interested to know more about the business - turnover, profit margins, how much the directors are paying themselves, etc. But it's not clear that they have a right to know these things, or that their interest outweighs the interest of the business owners in being able to tell them to mind their own business. So the deal here is that you can ask for more information, and you can make getting more information a conditions of dealing with the compay. It's standard practice to ask for more information and to get it, if you are making a significant loan to the company, or an investment in it, or entering into a partnership or joint venture with it. But it's not standard practice to ask for or get that information if you're simply extending short term credit by way of selling them goods on 30-day payment terms.