When you run a business, you should be concentrating on how profitable you are – profit will ultimately turn into cash and the business will continue to grow.
The first mission when getting to grips with your finances is to make sure you get decent monthly P&L’s. Once you have achieved this then you should turn your attention to your balance sheet.
What is a balance sheet?
The balance sheet is the financial position of your business at any given time. It is the only universally, publicly available document about your business and as such can be used to judge the health of your business.
The balance sheet contains all the assets of your business minus all the liabilities of your business and gives you a net position of the business. The position of your business should liquidate all assets, pay all creditors and be left with a net position.
The balance sheet contains:
Fixed Assets – These are long-term assets of your business, items of value to your business that will last longer than one year. Normally things such as cars, property, plant etc.
The costs of fixed assets are spread over a number of years and are taken to the profit and loss in the form of depreciation.
Current Assets – These are assets that are short-term of less than 1 year – this means they will turn into cash in less than 1 year, things such as debtors, stock etc.
Current Liabilities – These are short-term liabilities of less than 1 year – things you will pay in less than 1 year.
Long-Term Liabilities – These are liabilities that you will pay in more than 1 year, such as long-term loans, mortgages etc.
Net Assets is the balance of the formula below; what’s left when everything is paid off.
(Fixed Assets + Current Assets) Less (Current Liabilities + Long-Term Liabilities) = Net Assets
Why does it balance?
A balance sheet balances when the nets assets, as above, match to the following:
Retained Profit – Profit you have accumulated over the years
Current Year Profit – Profit from this year
Add these 3 things up and you get your Net Assets as above.
How do you improve your balance sheet?
A healthy balance sheet can be achieved by
- Making more profit
- Getting paid quicker
- Not stripping out all the company profit in dividends
- Paying creditors off on time
As part of our Financial Controller Service, we work with business owners to ensure that they have a good understanding of their balance sheet. Contact us to find out more.