Credit Analysis: CPL Software Limited

1. Credit Opinion: CONDITIONAL

CPL Software Limited presents a mixed credit profile. The company maintains a substantial net asset base (£918k) and positive working capital (£329k), with a long trading history since 2009. However, significant concerns around the dramatic cash depletion (from £612k in 2022 to £141k in 2025), heavy capitalisation of intangible assets (£468k representing 51% of total assets), and declining net assets from their 2022 peak warrant additional scrutiny before full approval. The recent headcount growth (23 to 31 employees) and £520k investment in software development suggest expansion, but the cash trajectory raises questions about sustainability without further information on profitability and forward-looking cash flows.

Recommendation: Approve with conditions – require latest management accounts showing trading performance, cash flow projections, and clarification on intercompany positions and the director's loan arrangement.

2. Financial Strength

Balance Sheet Summary (March 2025):

Key Observations:

• Asset Quality Concern: Intangible assets represent 42% of total assets. These capitalised software development costs may be difficult to realise in a distressed scenario and are subject to impairment risk if products underperform.

• Net Asset Trajectory: Net assets have declined 28% from their 2022 peak (£1.27M) to £918k. While still substantial, this erosion requires explanation.

• Gearing: The company is conservatively geared with total liabilities of just £197k against £918k net assets. Debt-to-equity ratio is approximately 0.21x – well within acceptable parameters.

• Intercompany Exposure: Amounts owed by group undertakings reduced significantly from £690k (2024) to £208k (2025). While this reduction is positive, the remaining balance is unsecured and interest-free, representing a concentration risk. The parent company (Byres Group Ltd) exposure needs monitoring.

• Director's Loan: B Welsh owes the company £72k (improved from £146k in 2024). While this shows the director has capital at risk, unsecured interest-free loans to directors represent a potential cash leakage risk.

3. Cash Flow Assessment

Liquidity Position:

Critical Concerns:

• Cash Erosion: Cash has fallen 77% from £612k (2022) to £141k (2025). This represents a £471k reduction over three years. Given that the Income Statement is not filed (small company exemption), the underlying profitability and cash generation capacity cannot be independently verified.

• Working Capital Adequacy: Net current assets of £329k remain positive, but have declined 74% from £1.25M in 2022. The current ratio of 2.73x is adequate but represents a significant deterioration from historical levels.

• Debtors Quality: Trade debtors of £87k appear reasonable relative to the business size. However, the composition shift is notable – group undertakings debt reduced by £482k while other debtors increased by £54k. This suggests either repayment of intercompany balances or reclassification.

• Cash Conversion: Without P&L data, it is impossible to assess debtor days or cash conversion cycles. This is a significant information gap for credit assessment.

• Employee Growth Impact: Headcount increased from 23 to 31 (35% growth), which will have increased the monthly cash burn rate for salaries. This expansion appears to be consuming cash reserves.

Working Capital Assessment: The company can meet current obligations from current assets, but the margin of safety has narrowed considerably. Any further significant cash outflows without corresponding revenue generation would create liquidity pressure.

4. Monitoring Points

Immediate Actions Required:

1. Management Accounts: Request latest management accounts (preferably to Q2/Q3 2025) to assess: - Current trading performance and profitability - Cash flow trends since March 2025 year-end - Working capital forecasts

2. Intangible Assets Clarification: Understand the nature of the £520k software development investment. Key questions: - What products are being developed? - Expected revenue generation timeline - Risk of impairment if development is unsuccessful

3. Intercompany Position: Obtain clarity on: - Terms of the £208k owed by group undertakings - Parent company (Byres Group Ltd) financial position - Whether group support would be available if needed

4. Director's Loan: Establish repayment timeline for the £72k owed by B Welsh and confirm no further advances are planned.

Ongoing Monitoring:

Sector Considerations: - Software businesses typically have high gross margins but can face rapid obsolescence risk - Property management sector focus provides niche positioning but creates sector concentration - Recurring revenue from software licences/support contracts (if present) would be a positive credit factor

Filing Compliance: Accounts and confirmation statements are up to date with no overdue filings. The company filed within statutory deadlines, which is positive for management quality assessment.