Risk Analysis: GOWEN & STEVENS LLP (OC321279)

1. Risk Rating: MEDIUM

While the LLP is technically solvent with positive net assets of £166,262 and has maintained operations for nearly 19 years, there are significant liquidity warning signs that warrant careful monitoring. The dramatic decline in cash reserves, heavy reliance on trade debtors, and increasing short-term bank indebtedness present a pattern that, if it continues, could escalate to high risk.

2. Key Concerns

Concern 1: Severe Cash Depletion

Cash has fallen from £249,627 (2021) to £9,288 (2025), a 96% decline over four years. The cash ratio (cash to current liabilities) stands at approximately 0.02x — effectively negligible. This leaves the LLP with virtually no buffer to meet obligations if trade debtors fail to pay on time. The pattern of cash depletion (with brief recoveries in 2022) suggests structural rather than cyclical cash flow difficulties.

Concern 2: Over-Reliance on Trade Debtors

Trade debtors of £560,906 represent approximately 88% of current assets (£635,717). With reported turnover of £1,664,092 (2023), this implies roughly 4 months of revenue tied up in receivables. If collection slows or any significant debtor defaults, the LLP's ability to meet its current liabilities (£393,506) would be immediately compromised. The year-on-year increase in trade debtors (£18,455) while cash declined raises questions about collection efficiency.

Concern 3: Rising Short-Term Bank Debt

Bank loans and overdrafts within current liabilities increased from £155,410 to £196,528 (a 26% increase), and a new secured overdraft of £25,129 has appeared. This suggests the LLP is increasingly reliant on bank facilities to fund operations, which is consistent with a business experiencing cash flow pressure. The security on the overdraft indicates the bank may share similar concerns about creditworthiness.

3. Positive Indicators

• Regulatory Compliance: Accounts and confirmation statements are filed on time with no overdue items. The LLP appears well-administered from a compliance standpoint.

• Established Business: Incorporated in 2006, the LLP has operated for nearly 19 years, suggesting some resilience and market longevity.

• Technical Solvency: Net assets of £166,262 indicate the business is solvent on a balance sheet basis, with total assets (£708,283) comfortably exceeding total liabilities (£542,021).

• Stable Asset Base: Total assets have remained relatively consistent at approximately £700k over recent years, suggesting no dramatic erosion of the underlying business.

• Workforce Stability: Employee count has increased from 19 to 20, which typically would not occur in a business facing imminent distress.

4. Due Diligence Notes

1. Profitability Assessment: The Income Statement has not been delivered (permitted under the small entities regime). Without visibility on turnover trends beyond 2023, profit margins, or operating performance, it is impossible to assess whether the cash depletion reflects trading losses, increased working capital requirements, or member drawings. This should be requested directly.

2. Debtor Aging Analysis: The concentration of 88% of current assets in trade debtors necessitates a detailed aging analysis. Specifically, determine whether the £560,906 includes any long-overdue or disputed balances, and what the normal payment terms are for the LLP's clients.

3. Former Member Liability: Note 9 discloses £71,015 due to a former member (increased from £67,957). The terms, maturity, and any acceleration clauses on this obligation should be investigated. This could represent a contingent cash flow risk.

4. Banking Facilities: The terms of the bank loans and the new secured overdraft should be examined — specifically, whether facilities are committed or demand, any covenant conditions, and whether the security extends to specific assets or is a floating charge.

5. Member Drawings: The reduction in members' loans from £195,039 to £166,262 suggests members are withdrawing capital. Understanding the LLP's distribution policy and whether drawings are being made ahead of retained profits is important for assessing whether cash depletion reflects member behaviour rather than operational difficulties.

6. PSC Concentration: Mr Deepesh Chandubhai Patel holds more than 75% of voting rights, rights to surplus assets, and the right to appoint/remove members. This level of control means key decisions rest with a single individual, creating key-person risk.