We are often asked by clients about the difference between Financial Accounts and Management Accounts and why credit insurers request this information. Here we address these differences, summarise how insurers use this information and provide an update on why up to date financial information is requested by insurers more frequently in the current environment.

Financial Accounts

In the UK it is a legal requirement for all private limited and public companies to file their accounts at Companies House. A copy of the accounts prepared for the members/shareholders must be filed at Companies House. A dormant company that is also a subsidiary may be able to claim exemption. Unless the accounts being filed are the company’s first accounts then the time allowed to deliver the accounts to Companies House is:

• 9 months from the accounting reference date for a private company
• 6 months from the accounting reference date for a public company

There are 3 size classifications for the purpose of filing accounts; small, medium and large. These are dictated by thresholds for turnover, balance sheet total and average number of employees of the company.

Small companies also have a subset called a micro-entity for very small companies. The smaller the company, the more exemptions the business benefits from in terms of filing requirements. Small companies and micro-entities are exempt from audit and the requirement to file a directors’ report or profit & loss account.

Small companies are also able to prepare and file a set of abridged or simplified accounts, provided they have unanimous shareholder consent. Micro-entities have their own form of abridged accounts which they prepare which differ from the requirements on small companies. If a company is a micro-entity or small company then they are likely to be filing abridged or even fileted information/accounts with Companies House.

The contents of medium-sized company accounts must include: a profit and loss account, a balance sheet, notes to the accounts, group accounts (if appropriate), a directors’ report with business review and an auditor’s report.

If a company does not meet any of the thresholds set for micro-entities, small or medium, or is ineligible (e.g. a public company), they are considered a large company and must prepare and submit full accounts to Companies House.

Why do insurers request the Financial Accounts of your customer/buyer?

Credit insurers require the financial accounts as part of their risk underwriting to assess the financial health of a company and compare to prior year accounts. If a company is public, large or medium sized then this information will be publicly available at Companies House and the insurers will have access to this information.

If a company is a micro-entity or small company then they are likely to be filing abridged information with Companies House. This means the insurers have limited insight into the financial health of a business. An insurer may request that the buyer/customer contacts them to provide this information on a confidential basis or may seek to contact the customer/buyer themselves to request the full accounts. Financial accounts of this nature will be treated confidentially by the insurers and the details of the accounts will not be disclosed to the policyholder, insurance broker or any other insurer.

Management Information

Management Information/Accounts are produced by businesses on a monthly or quarterly basis. There is no legal requirement or set criteria for what should be included in management accounts. Instead, the contents are dictated by the requirements of the directors and shareholders. Management accounts are essential to monitor the performance of a business and for day to day and strategic decision making. As they are produced on a monthly or quarterly basis they provide a very up to date insight into the financial health and progress of a business.

The management accounts only need to include what the board, management or shareholders need to see so will vary from company to company and industry to industry. It is common for the following to be included in management accounts produced:

• Budget – prediction of the income and expenses of a business
• Cashflow Statement – shows cash inflow and outflow from operating, investing and financing activities
• Balance Sheet – shows the value of a business on a particular day
• Profit & Loss – shows the costs which relate to sales for a particular period

Why do credit insurers request Management Accounts?

We are often asked why credit insurers request up to date Management Accounts, especially as it is not a legal requirement to file the accounts or make these accounts public for private companies. Insurers are assessing the risk of buyers on a day-to-day basis, up to date management accounts is one of the ways they make this assessment.

Financial Accounts are useful to provide a historic view of the financial health of the business, but the information is aged so does not provide current insight. It is common for risk underwriters to need to request up to date Management Accounts to allow them to make an informed assessment of the current financial performance of a business.

Impact of Coronavirus

Coronavirus has led to the Government extending the filing deadline for Financial Accounts. This means that many of the most recent filed Financial Accounts predate the pandemic so they give underwriters no insight into the impact the lockdowns may have had on a business. Any accounts prepared (other than under FRS105 for Micro companies) are required, if signed after 25^th March 2020, to include a Coronavirus impact statement in their accounts. In the current environment Management Information/Accounts have become increasingly important to allow insurers to make an assessment of the ongoing financial viability of a business.

As with Financial Accounts, Management Accounts are provided to the insurers on a confidential basis and the contents of the accounts or assessment of the accounts will not be disclosed to the policyholder or other parties. If you have any questions regarding one of your customers or would like a free non-obligation assessment of the financial health of your top 10 customers, then please contact one of the FinCred team on 01732 749750 or info@fincred.co.uk