Balance sheets and how to read them

1 April, 2021

In my last few articles, I’ve spent a lot of time telling you why it’s so vital to keep your books up to date and keep clear financial records, especially as we approach the end of the tax year… but have I jumped too far ahead?

This week I wanted to go right back to basics and break down exactly what you should be including in your balance sheet, and what it all actually means.

A balance sheet is a snapshot of what your business owns (assets), and what it owes (liabilities), at a specific point in time.

By creating a balance sheet for your business and looking at it alongside your income and cash flow statements, which I touched on a few weeks ago

, you can make a clear assessment of your business’s current financial situation.

The main items that your balance sheet should include are:

  • Fixed assets
  • Tangible assets
  • Current assets
  • Stocks
  • Debtors
  • Cash at bank and in hand
  • Total current assets
  • Current creditors: amounts falling due within one year
  • Net current assets/(liabilities)
  • Total assets less current liabilities
  • Long term creditors: amounts falling due after more than one year
  • Provision for liabilities
  • Net assets
  • Capital and reserves
  • Called up share capital
  • Profit and loss account
  • Shareholders’ funds
Now although a lot of these items are good to know, they are mostly for your accountant to worry about and they won’t have much impact on the day-to-day running of your business. So which ones will?Working capital
Working capital is made up of trade debtors (the amount clients owe your business), trade creditors ( the amount you owe to suppliers) and stock. This links back to the point I made in a previous article about keeping on top of your payment terms. Make sure your clients have clear payment deadlines and that they’re paying on time to keep your books balanced. Problems will start to build if you have to pay your suppliers on time whilst your customer’s payments come in late.

Debt
On your balance sheet debt should be split into two categories; current creditors (debts due within 12 months) and long term creditors.

Including debts on your balance sheets is vital as it provides a useful guide on the overall financial health of your business. By subtracting your cash and cash equivalents from your total liabilities you can see your net position.

If you have more debts than cash your business it is described as being in a ‘net debt position’, but if you have more cash than debt its described as a ‘net cash position’

Although being in a net debt position sounds like a death sentence, it’s not, especially after the pandemic and the year we’ve just had. Balance sheets require you to look back at your finances from the previous year, but in this case for many businesses, the income from the previous year will be a fraction of normal levels.A good measure of your debt levels is to take your EBITDA (earnings before interest, tax, depreciation and amortisation) figure and divide it by the total debt shown on the balance sheet. The ratio indicates how much debt your business holds in relation to its earnings.

One of the points to have come out of the recent budget announcement that’s in your favour, was the chance to carry back your losses for 3 years, meaning that any losses you may have made this year, you can get back from the corporation taxes you paid on the previous 3 years profit.

By staying one step ahead of the game and filing your accounts as soon as possible, you are giving yourself that corporation tax rebate months earlier than you would if you submit later on in the year. In this time of financial struggle for many businesses, why wait another nine months for financial help when you could submit in April and get that rebate early.

It could well mean the difference between a negative and positive financial position at the end of the fiscal year.

How Auria can help
For years, we’ve been talking to clients about staying one step ahead by keeping your books up to date as the year goes on rather than rushing to do it all at the end of the year, but we also understand how daunting it can be to make such a big commitment and change.

Although we are accountants we are much more than that. We’re business advisors, here every step of the way on your business growth journey – and helping you with your balance sheet is just one of the many things we can do for you.

If you need help sorting out your business’s balance sheet and other financial statements, why not drop us an email at enquiries@auria.accountants or give us a call 020 7291 1000 and let us help you.

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