In an earlier blog we looked at the different sections of the profit and loss account and what to look for as points of concern and indicators that a business is doing well.
In this blog we will look at the accompanying financial statement known as the balance sheet or statement of financial position. Unlike the profit and loss account which covers a period of time, usually a year, the balance sheet works like a snapshot, capturing a moment in time.
Like the profit and loss account, the balance sheet contains several sections which together allow you to see how well a business is doing.
Fixed Assets or Non-Current Assets
These are the large or expensive assets in a business, such as vehicles, machinery or buildings. Intangible assets such as goodwill can also be included, possibly in a separate intangible assets section while the previously mentioned assets will be in a tangible asses section.
The figure shown will be the original cost of purchasing these assets, with any depreciation subtracted from them allowing you to see the current value of the assets.
These are assets that you are in theory able to liquidate into cash much easier than the fixed assets. This includes assets such as debtors or receivables, bank accounts, stock or inventories and any cash the business owns. These are usually in order of most difficult to liquidate at the top and easiest at the bottom.
Ideally this will be a high figure with most of the value in the easier to liquidate assets. A high figure in the more difficult to liquidate assets could be a problem as it may mean most of your money is tied up in unsold stock and debtors whom you are waiting to pay your invoices.
These are amounts that your company owes which will likely need to be paid within the next financial year. This can include owing tax, creditors or payables, a bank overdraft or a director’s loan account. Naturally this figure is better when it is lower, as it means the business does not owe much money to outside sources.
Net Current Assets or Working Capital
This figure is calculated by subtracting the current liabilities from the current assets. It looks at how much money the business could readily access once it has paid off all of the money it owes.
You will want this figure to be as high as possible to show that your business is doing well. If the figure is negative there is a big problem; unless additional funding is introduced to the business, it will be unable to pay the money it owes. If the net current assets is a negative value it would be worth investigating the cause. A negative value is also known as net current liabilities.
Fixed Liabilities or Non-Current Liabilities
These are the amounts the business owes that are likely to be paid over a period of several years, such as a bank loan or mortgage on a property. If you are looking to purchase a business that has fixed liabilities, it is worth looking into the liabilities to learn of any extra costs such as interest and the terms for paying back the liability.
This figure is made up of all of the assets with all of the liabilities subtracted from them. This figure gives you the overall value of the company. A positive figure is preferable, however if the figure is negative due to a large fixed liability or a lack of fixed assets it may not be a problem. Always investigate the cause to be sure. A negative value is also known as net liabilities.
Equity or Financed By
This figure shows where the money that makes up the net assets figure comes from. This can include capital introduced, drawings, profit or loss for the year (and overall) and capital generated by shares.
This figure will be the same value as the net assets and can provide some extra insights into why there might be a negative figure if this is the case. The main cause here may be a large loss for the business, meaning the business has not been faring very well. The other cause could be a large drawings figure, which means that despite the business generating a profit, the owner is drawing more money out than the business is able to provide.
Naturally a positive value made up of mainly profit is the ideal, as it shows the company is not only able to sustain itself, but able to generate enough income to draw a sizeable profit as well.
If you require any further advice or assistance on the above, or with preparation of such documents, please do not hesitate to contact us.