When preparing a business plan it should include:
• A profit and loss statement.
• A cash flow statement.
• A balance sheet.
In this article I will cover what I believe to be the most misunderstood accounting statement – the balance sheet. Yet if used properly it can be a very useful indicator as to the viability of your business and as a means of raising equity and business loans from banks.
Essentially, a balance sheet is a financial statement that summarises key parts of your business:
Assets: What your business owns – e.g. equipment, motor vehicle, land and buildings etc.
Liabilities: What the business owes – e.g. trade creditors, bank loans etc.
Equity: Funds invested into the business, such as via share capital together with profits / losses.
The balance sheet is prepared at a point in time and limited companies will need to file one at Companies House at their year end.
Understanding the ‘balance sheet’
A balance sheet gets it name from the fact that assets must always equal liabilities plus equity. It is a ‘snapshot’ of your business at a particular date in time.
Example: Were you to raise a loan from the bank for £5,000 you will have an asset of £5,000 (cash from the bank loan) and a liability of £5,000 as you still owe the bank £5,000.
£5,000 cash asset = £5,000 loan (liability).
Usually, assets of a business are split into two categories:
Fixed assets – These are ‘tangible assets’ such as plant and machinery, land and buildings, fixtures and fittings and by definition have a long-term use.
Current assets – These are assets that can be converted into cash within a year and include bank accounts, stock, money owed to your business (trade debtors) etc.
Liabilities are monies that are owed by the business to ‘third parties’. This would include loans made to the business including personal and bank loans, trade creditors (for purchases by the business), taxes, HP agreements etc.
Similar to assets, liabilities are split into two main categories:
Current liabilities – This is money that is owed and payable within one year. This would include trade creditors, short-term loans, taxes (VAT, corporation tax, VAT) etc.
Long-term liabilities – These are creditors that are payable after one year and typically would be bank and shareholder loans.
How to use the balance sheet
Net worth – The above company is ‘solvent’ as the Shareholders’ funds are above zero and the business has a net worth of £43,251.
Raising cashflow issues – The balance sheet above shows net current liabilities of £43,251 (2018) with only cash at the bank of £1,575. However, there are other assets that can be realised and if necessary the £25,000 investment. In the short-term though the company would struggle to pay its current liabilities.
There are ratios that can be used such as the current ratio – it is expressed as the number of times current assets exceed current liabilities. In the above example this figure is not positive and would raise concerns with a potential investor.
Get your tax affairs in order pre-release
5th April 2019 marked the end of another tax year – 2018/19
Remember to contact The Tax Academy CIC to review your tax affairs to ensure they are up-to-date. There is nothing worse than being released from prison and finding that you have tax penalties and tax debt that need to be resolved with HMRC.