How can you know if a business makes money?

[EmmaEmerald]

Posting here as the business section doesn't have much going on.

I work freelance, and before I agree to work, I normally look on companies house to be sure the company is legit.

I'm starting to look at the accounts as well, because I've turned down work from a couple of people who I suspect don't have the money to pay.

I was genuinely amazed how little some companies seem to be making.

But I'm aware there are certain methods of accounting which may make things look different.

For example, one company looks like it's issuing one share, presumably to the owner, and I don't know what means.

Or is it really the case that some of these companies just aren't making much money. To use an example there's one chap who seems to have made 21,000 in 2023. But to hear him talk, and knowing his consultancy fees (on his website) it surprises me. I looked at a couple of his competitors and saw similar amounts.

I'm looking at the shortened version of the accounts which I think is what you see on Companies House.

Both the clients I was looking at don't have stock as such - they just offer a service like an advisory service.

Is it possible they are actually doing better and it's just not visible to outsiders? Thank you.

Small companies don’t have to disclose much in their Companies House accounts so it’s really hard to tell. Could you try signing up to a credit checking agency eg Experian? I don’t know how much they charge but that will give you more of an indication whether they’re paying their bills.
(I am a chartered accountant and buy small businesses in my job)

Issuing shares is probably irrelevant by the way. The number of shares is pretty meaningless.

Do you mean they reported revenue or profit? There are many reasons why profit might not look like much but revenue could still be significant

I agree with GreenBanana that small companies don't disclose much financial information via Companies House. You don't see full dividend information, for example.

Lots of self employed/ companies have all sorts of different payment terms. You are allowed to set your own to suit your needs and minimise your risk.
50% upfront, 100% upfront, paid in monthly increments etc. You let the customer know your terms at the point of setting up contracts and they can choose not to use your services if the terms don't suit them. That's an easy way to minimise your risk and weed out the time wasters.

Usually small companies try not to make a profit as that money gets taxed. They often pay themselves dividends to mop up any excess cash, or invest it back into the company just keeping a minimum of cash in the company. It's very difficult to judge from the outside if the company is struggling or if they are being tactical with their finances.

But they would have to pay tax on the dividends, surely?

This is why it means nothing when the Daily Mail triumphantly 'proves' that Swanky Celeb's new business venture is a humiliating failure, because there's only £2.37 in the company accounts, according to Companies House - the money is carefully accounted for elsewhere...

There are plenty of ways to minimise the tax bill that wouldn’t show in the statutory accounts such as paying family members a salary (often just enough to utilise their tax free allowances), pension contributions, paying for their lifestyle costs (eg holiday travel, cars, memberships) out of the company. Revenue isn’t disclosed in these small company accounts you can usually only see the Equity movements.

They don’t have to report the full accounts in companies house. So it’s pretty hard to tell sometimes.

They could be paying a large salary or pension payments for example to the director and his wife and that would reduce their profits for corporation tax. Or investing all the profits back into the company by buying equipment

You don't need to worry about whether they have the money to pay, use an escrow account. I've been freelancing since 2012 and it's never let me down yet.

Apols if I don't reply directly to all the posters

thanks so much everyone

@GreenBanana445 Thank you for the Experian idea.
It probably is the case then that I can't gauge any further information from Companies House.

By way of comparison, I looked up my dentist (!) and the amount of profit he is reporting sits in line with what I'd imagine his earnings to be, and I can see he can comfortably pay his staff and office fees etc

But with less tangible services, I'm baffled. If they don't have to give much info to Companies House, that makes sense.

@custardlover One company is just reporting capital and reserves. Again, I find this confusing when they're offering consultancy services and he works from a hub type place but then he will know the tax advantages of setting himself up as a company.

Generally - another reason why am asking is because I think my future might be returning to a salaried job, but part time. As self employed, I hear a lot of talk about reducing tax via umbrella companies etc but I don't really understand it and don't want to get into stuff that I don't understand.

I've been lucky and got work from the big places I worked for in the past. This is reducing sadly.

Looking at the future, I wonder if many of the businesses who are out networking are actually just running a business for minimal money and their personal wealth or income is from elsewhere.

but if they don't have to account for any salaries paid on CH, that explains why the profit shows low - I feel a right plum! I thought they'd have to put salaries under costs.

thanks all.

The accounts submitted to Companies House by micro companies is pretty meaningless really. It doesn't show revenue, costs, profits nor dividends. All it shows is a balance sheet which is a snapshot at a particular date of the assets and liabilities, i.e. book value of equipment, monies owed to it, monies in the bank, monies it owes. You can ignore share capital completely as that's meaningless really.

Even using credit reference firms such as Experian often show nothing of use as they use the same Companies House information and bill payment history/patterns if any bills are paid to suppliers using factoring agents, and maybe some data from company credit card usage. I wouldn't really waste my money on an Experian credit check for a small/private business as it's unlikely to be of much use at all.

As said by a PP, just negotiate some payment terms in your contract, i.e. maybe a deposit upfront, agreed stage payments, agreed payment terms, etc., so at least you can limit your potential losses.

Not even heard of escrow accounts, I'm glad I started this thread but I feel a right plum.

This is a really stupid question and shows how out of date I have become. The salary they pay themselves before they make a profit...how is that taxed?

This thread is making me understand more why people have asked me why I'm not set up as a company in the past. There is one lady I work with who I now realise, maybe writes off her entire wardrobe, make up etc as a business cost. I didn't think that would count as an allowable expense but perhaps it does.

It depends what she's using the clothes for. Is she on television? If she's just wearing them to work she might struggle with that - or is it a uniform?

Using an Umbrella company doenst reduce tax, in fact it decreases your income as you have to pay them.
To give an example DH was offered a £600 a day contract but they wanted him to use an Umbrella Company, he would have ended up with just over half of that.
There are other ways of legitimately reducing tax though but to be honest if the Tax and admin aspect of being Self employed scares you then its probably better that you are employed instead

@MILTOBE No, but she does speak at some events, and has an Instagram reel running from various other events she attends. I think there's a fair case to be made for brand image etc.

@Hoppinggreen I'm already doing it, have been SE for years, but your comment confirms what I thought - I don't make anything like that money, so it would never be worth me doing something via umbrella companies etc.

I've known other people say it's not worth it, the impression I was under is that the umbrella companies are the ones making money and I'm not clear what they do!

I feel as if I missed many, many lessons in the game of "how to make money"!