Production management

from a bank. Banks will take security over some or all of the company’s assets to cover their exposure for the period of the finance. For unsecured creditors, modest amounts of credit can be offered until such time as a satisfactory trading history has been established or the first years trading accounts are filed. When accounts are filed at Companies House more information can be used to make a credit opinion. For limited companies, this is very often the basis upon which a credit rating is derived. All credit agencies have the equivalent of a ‘Coca Cola formula’ for rating companies, each having slightly different ingredients, which make up their own credit ratings, but, there are certain fundamental principals that are really common sense. Current filing requirements are fairly minimal for small/medium companies, but the data, when extrapolated, provide key indicators on a company’s performance. The ‘Bottom Line’ is always significant. This is a company’s net worth - the sum of the issued share capital and the profit and loss account. It is recommended that business should keep the net worth positive - negative net worth will always be a hazard to ratings. Movements in the net worth will effect the credit rating. File profit and loss accounts, so that any downward movements in the net worth can be seen to be drawings or losses. The natural assumption is that negative impact on the net worth of a company is due to losses, if there are no other explanations. However, a drop in the value of a profit and loss account can also be caused by dividends being taken out, which exceed the profit for the year. Another trick is to retain some profit in the business, thereby

july 2008

increasing the net worth each year. This shows that more is being retained and invested in the business, which gives a favourable prospect for a good credit rating. Look at share capital - how much have you invested in your own business when you are expecting suppliers to grant credit on unsecured terms? How much credit would you offer to a company where the shareholders are only prepared to put two £1 shares at risk? Have you, as a director or shareholder, loaned the company money which you have no intention of redeeming? Consider capitalising the loan, this will increase the net worth and most likely will have a positive impact on the credit rating. Record borrowing terms accurately; loans and overdrafts are different. Bank loans, other than the portion falling for payment inside one year, which are included in overdraft values, will have an effect on the working capital position. Remember that your supplier is interested in ascertaining whether your company can repay them. Working capital is a measure of cashflow, so it follows that negative working capital (where current liabilities exceed current assets) will be taken into consideration for a credit rating. As current assets are principally assets that can be easily converted into cash, ie stock and debtors and (obviously) cash, a negative working capital position raises a few concerns. It indicates that the company could be suffering from a cashflow problem, or is overtrading, but at the very least, it would not be able to meet all of its current liabilities from readily available funds. Having dealt with the publicly available information from Companies House, it is also important that attention should be paid to current

production management

trading relationships: Pay suppliers within agreed terms - in today’s economic environment more and more trade payment data is used by credit agents as a guide to current credit worthiness. More obviously, avoid negative information, county court judgments, petitions for winding up - no matter what the outcome. With the current market conditions and in the prevailing ‘rescue culture’, there are more avenues for mediation than ever before. It is correspondingly interpreted as a sign of financial stress when a small company incurs a series of county court judgments. Take an objective view of your company and consider for a moment, exactly what information is available to your potential credit supplier. That means a supplier that is prepared to let you have any goods or service, without you paying for it until sometime later, not just loans or finance. The creditor needs to be able to judge whether they will eventually get their money and they look at various pieces of information upon which to make this judgement, including, but not exclusively a credit reference agency report. Credit policies are not set by credit reference agencies; they are set and run by the individual supplier. When credit is key to a transaction, enter into a dialogue with your supplier to enable them to have as much data as possible, in order for them to make an informed decision.

Sources of Information: Free company credit report - www.freesearch.graydon.co.uk Companies House - www.companieshouse.co.uk Your accountant - advice on rearranging finances to enhance business standing

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