Micro-entities are hard to evaluate – with limited information available, whether you are looking to assess financial health or determine lead quality, you’re often left with uncertainty.
According to GOV.UK, micro-entities are very small companies which have any two of the following characteristics:
- A turnover of £632,000 or less
- £316,000 or less on its balance sheet
- Ten employees or less
The reason that they present an issue is that they can provide Companies House with fewer financial disclosures than small companies.
Micro-entities can prepare simpler accounts that only meet minimum statutory requirements; they also only need to send their balance sheet to Companies House.
Among the accounting simplifications is the ability to account for investment properties at cost less impairment rather than at fair value – this can make judging a company’s value particularly difficult.
For these reasons, it’s difficult to make a judgement on the health or performance of the business based on its profile at Companies House alone.
However, Red Flag Alert can provide reliable conclusions based on a much more sophisticated process. In this article, we’re going to take a look at how Red Flag Alert evaluates micro-entities and why it is an essential tool for your business.
Putting Business Events into Context
Red Flag Alert is a business intelligence tool that collates and analyses data on every UK company, with multiple sources, 100+ data points on each business and daily updates.
Over 13 years of daily iterative learning on individual changes to the circumstances of the UK’s 6.5 million companies has allowed us to develop complex algorithms that put business events into context.
This means that we can accurately assess what risk implications or sales opportunities a micro-entity may present, even though the available information is limited.
In the next section of this article, we’re going to take a look at a few examples of how we begin to evaluate the financial health of a micro-entity.
Registering for VAT
Red Flag Alert can identify companies which register for VAT – a useful indicator of two things:
- First, companies that earn £87,500 must legally register for VAT. So if a company goes from zero to £87,000+ in a matter of months, then it could be a good indicator of financial health.
- Second, it reflects good organisational practices and competent management. Not registering for, or failing to pay VAT are signs that not all is well at a business whereas those companies that register and pay on time are likely to have more solid operational processes.
More insight can be gained from those micro-entities that are VAT-registered than those which are not. For example, if the company fails to pay the tax, then HMRC will issue a petition which Red Flag Alert will pick up on.
Even micro-entity balance sheets can be revealing and our highly sophisticated algorithms will assess profitability, liquidity and gearing, together with the financial trends of even the smallest entities. Additionally, our credit scoring and decision systems are built to identify risk in businesses of all sizes, with specific scorecards for dealing with micro-entities.
Overdue accounts and adjustments to accounting periods are a sign that a company is in trouble – both of these events are more common in businesses that are struggling.
Our algorithms will also spot irregularities in the filing of accounting period changes (by referencing the AA01 form). Companies facing financial difficulties can delay the filing of accounts without being flagged as ‘late filing’ by adjusting accounting periods.
Creditor Services Data
When a business goes into administration, it can have a devastating impact on its unsecured creditors.
Trade creditors will often see less than 10% of the money they’re owed – often they won’t see any of it – and these businesses can be up to three times more likely to go out of business than they would normally be.
Red Flag Alert identifies companies at risk of insolvency by calculating the creditor’s assets and their net worth against the bad debt and the value of future business lost.
A major failure in the construction sector can force hundreds of companies into Creditors’ Voluntary Liquidation. Even companies covered by trade credit insurance can still be at risk.
This information can be used by companies seeking to sell products aimed at reducing risk. These could include insurance, short-term financing, invoice financing and professional services firms.
Make Sound Business Decisions
Red Flag Alert is a critical tool for those companies working with large numbers of micro-entities, whether that is as a supplier, a customer or even a prospect.
With hundreds of data points on 6.5 million companies and health scores that have been developed over 13 years, our vast pool of real-time intelligence provides the best available insight into micro-entities – helping you to measure risk and make sound business decisions.
For a free consultation about how Red Flag Alert’s data can help you to evaluate micro-entities, sign up for our free trial today.