This piece was originally written by Kathryn Wharton with expert insights from Justin Turner, Director at Orange Umbrella in June 2023.
Following the liquidation of the company Kathryn was working for, it was written in response to helping others understand the financial stability of a company. This was predominantly from the perspective of making a career move but the knowledge will also help business owners get insights into the stability of potential partners, customers or suppliers.
According to research conducted by the Independent, Britons consider moving on from their current career up to 10x a year. If you are on the hunt for a new job role, or deciding whether to stay with your existing company then there are so many things to consider. From finding enjoyment in the day to day tasks of the job role to the work/life balance the company offers. Another consideration is the financial stability of a company following the challenges from the pandemic, the rise of inflation and a looming recession.
If you know what you’re looking for, then a company's financial record, which you can access via Companies House, can give you a wealth of knowledge. Like most people, I was never taught to read a company’s financial record and learnt the hard way that all wasn’t as it seemed at a company I moved jobs for.
As someone who vows to learn from my mistakes, I sat down with Justin Turner, director at Orange Umbrella, who provides accountancy and bookkeeping services to discuss what the top three pieces of information are on Companies House, that could help you ascertain the financial stability of a company and your next career move.
Getting started
Any company that you’re joining should have a legal registered name which might be different to the trading name and company number. You can access their accounts using this information on the Companies House website. Here are our three recommended pieces of information to check out
1. Warnings on the overview page
Here’s the company page for Orange Umbrella (figure 1). As you can see, the accounts are up to date, however if you see the warning in red from an undisclosed company (figure 2) then it means that the company hasn't got their statutory documents in on time. This should be taken as a warning sign, and you should definitely look closer at the accounts. If you are feeling brave enough then it could be something you raise with the hiring manager to see if they can shed any light on the situation.
2. People
When you're looking at opportunities, especially in smaller companies then check out the people associated with the company (figure 3). Have you met or do you recognise any of the named people? Have there been loads of resignations? This could be a sign of turbulence or discontent within the company. One way to dig a bit deeper into this, is to ask the hiring manager or at the interview stage about the governance of the company.
3. Look at the last set of accounts
Location of the company accounts and balance sheet fFigure 4 & 5)
Within the filing history you should find the most recent accounts (figure 4 & 5). For small businesses these are unaudited abridged accounts which won’t show profitability but if you look at the balance sheet, will show a snapshot of a business at a specific moment in time. Medium sized companies have audited accounts which include the Profit & Loss (P&L), plus further information and Public Limited Company (PLC) accounts are available on the investor centre.
Example of a balance sheet from an anonymised company (figure 6)
Figure 6 is an example of what a balance sheet can look like. Due to accounting standards FRS102 and FRS105 (the most common), the balance sheet format should be more or less the same for micro entities) The numbers can be confusing but key metrics to look at are:
Total equity - Total equity is the value of a company. If this number is in brackets, then it means it is in negative equity. We suggest looking at the prior year, which is provided for comparable information. Ask yourself, is it going in the right direction? 2021 was a terrible year due to the pandemic but you would hope there would be recovery in 2022. If the total equity has jumped down then that could mean the company is in financial difficulty. Any company in negative equity does raise alarm bells. At the end of the article there is some extra information about why negative equity is a risk.
Cash at bank - It can be a long time between the accounts being prepared and published, so this figure might not be accurate in the here and now. But, it could be a good indicator of how the business is being run (e.g. hand to mouth or planned).The company accounts usually show the average number of employees so multiply that amount by your monthly salary to get a ballpark figure, and see if the float is healthy enough to cover at least a couple month's worth of wages.
Debtors & Creditors - Debtors can be viewed as nearly ready cash and creditors are monies owed. You do need to be careful to distinguish between short and long term creditors which are paid back over 2-5 years and won’t affect immediate cash flow.
Have a look and see if there is enough money to cover the short term creditors? The money needs to come from somewhere. Compare the number with the previous year, is there a dramatic difference, and if so, is it going the right way? It’s hard to stop a fall if it's going in the wrong direction too quickly.
As mentioned earlier, if you have concerns then you could dig into it at an interview. It is a difficult question to raise but it does show business acumen and it’s all public information. It’s an important question to ask, especially if you are leaving a job where you have employment rights e.g. passed probation, entitled to redundancy pay. (after 1 year of employment you have rights to employment). Any open and transparent employer should be able to offer an answer.
Other helpful resources
If you are looking for a more digestible financial report then Experian offers a one off credit check report for limited companies for only £24.99. A bargain if you are thinking of leaving a company where you have accrued employee rights and have a certain amount of protection. Not only do they detail all the financial information but they give a score out of 100 based on financial risk and calculate the acid test ratio to measure whether the company is ‘distressed’ or not. It’s not always cash distressed, it could be distress due to CCJs.
What now?
Hopefully this article has gone some way to demystifying the public information available on Companies House. We wouldn't recommend just basing your decision making on this one article but hopefully it has given you more confidence about what to look for before your next career move. Finance is a complicated business so don’t beat yourself up if you don’t understand all the information on Companies House. If in doubt, seek out a second opinion from someone more financially literate before making a huge decision.
Here is some extra info about why negative equity is a risk
Financial Instability: Negative equity indicates that the company's financial position is weak. It may struggle to meet its financial obligations, such as debt repayments, supplier payments, or operating expenses. This can lead to cash flow problems, increased borrowing costs, and potential bankruptcy or insolvency.
Difficulty in Obtaining Financing: Negative equity makes it challenging for a company to secure new financing or attract investors. Lenders and investors prefer companies with positive equity as it demonstrates financial health and a buffer against potential losses. Negative equity may limit the company's ability to fund its operations or invest in growth opportunities.
Reduced Credibility and Reputation: Negative equity can damage the company's reputation and credibility in the market. Stakeholders, including customers, suppliers, and business partners, may view the company as financially unstable or risky. This can result in reduced business opportunities, strained relationships, and difficulty in attracting and retaining key stakeholders.
Legal and Compliance Issues: Negative equity may trigger legal and compliance concerns. Depending on the jurisdiction and industry, there may be legal requirements regarding minimum equity levels, financial reporting, or obligations to creditors. Failure to meet these obligations can result in legal consequences, regulatory penalties, or further deterioration of the company's financial position.
Limitations on Growth and Investment: Negative equity restricts a company's ability to pursue growth strategies, such as acquisitions, expansion, or research and development. Without sufficient capital, the company may struggle to invest in new products, technologies, or market opportunities, putting it at a disadvantage compared to competitors.