The balance sheet is a statement of the wealth and health of your business at a given point in time, usually the month end or year-end date.
This is a tally up of everything you own, everything you owe to other people, and everything that you owe out to suppliers, HMRC, loans etc.
The net of all of this is theoretically what you would be left with if you stopped trading at that date – ie. if you sold everything your business owns, collected in all your debts and paid out everything you owe, what would you be left with. This is why it’s important to make sure you understand and check your balance sheet regularly, to make sure things like assets and stock are not over-valued. This could create a black hole in your balance sheet.
The balance sheet has a direct link with the profit and loss; the net sum of all of your assets and liabilities equals all the profit you’ve ever made, plus any money you put into the business.
This is the basic layout of a balance sheet, showing what should go into it:
This is any assets you have, so premises, plant and machinery, equipment, computers etc. The value is shown as a “net book value” which includes the depreciation on those assets so far. This is designed to show what they are likely to be worth as they fall in value.
This includes cash, and other items that can be converted into cash in the short term – ie within the next year. This includes:
- Work in progress
- Debtors – owed by customers
- Bank balance – if in credit
- Petty cash
- Prepayments – these are costs that you’ve been invoiced for that relate to a future time period, eg annual rates bill, annual insurance, annual or quarterly maintenance or support agreements. Because the profit and loss only wants costs that relate to that current time period we need to hold these future costs on the balance sheet. For example we don’t want to show a whole years’ rates bill in one month.
These are liabilities that you have to pay out in the short term – ie within 1 year, and includes:
- Bank overdraft
- Amount owed on factoring or invoice discounting facility
- Creditors – owed to suppliers
- Credit card
- Wages due
- Corporation tax
- Accruals – these are costs that you know you have incurred but not had the invoices yet. Because the profit and loss account needs to show all of the costs for a given time period, even if the actual invoice for that cost hasn’t been received yet, sometimes we need to “accrue” for those costs to make sure we have all of the relevant costs in the profit and loss. Whilst we’re waiting for the missing invoices to come in, we put those costs into Accruals” so we know that we have a liability to pay them, even though we haven’t got the actual invoices yet.
- Any loans due for repayment this year
Net Current Assets: This is a really important calculation on your balance sheet – this is current assets less current liabilities. This tells you if you can pay all of your liabilities as they fall due. This is a calculation used to measure how solvent your business is, so you should always look at this figure every month. You want that figure to be getting higher every month so you know that you’re making your business stronger.
If this figure is positive then you have more assets than liabilities which is good.
If the figure is negative it means you don’t have enough cash to pay your debts as they fall due – you would expect cashflow to be tight if this was the case. You need to urgently address negative assets as it could be an indicator that your business is insolvent.
Long term liabilities
This is debt that is repayable over longer than a year. This will usually be long term bank or other loans and hire purchase / equipment and vehicle finance agreements.
Total net assets / liabilities – this calculation is:
Plus current assets
Less current liabilities
Less long term liabilities
i.e. – the sum total that would be left if you sold everything, collected all your cash in, and paid off everyone you owe money to.
Capital and Reserves
This figure must match the total net assets / liabilities above.
It’s made up of:
All of the profits and losses you’ve ever made
Any capital you put into the business.