YOUR BUSINESS BALANCE SHEET

The business balance sheet is one of those essential financial statements that every business must keep if it is to succeed. Along with the income and cash flow statements you can’t do without it.

As you are aware all business consists of two streams of money, money-in and money-out. Track them carefully and provided the money-in stream is greater than the money-out stream your business will grow.

Tracking these streams is a lot easier if you have prepared a business balance sheet as a projection of your company assets and liabilities into the future.

Like everything else to do with bookkeeping this can be a total pain, but let me assure you, it is essential. The hard work that goes into forecasting your assets and liabilities over the next twelve months and then over the next two to five years, only to find that in fact you hardly ever meet forecast, can be disheartening, if you let it, but it still needs to be done.

The thing to remember about any form of budgeting is that the thought that goes into the preparation is what counts. Here is where you learn.

If you can begin to understand the money-out and money-in basis of business, through your books, you will begin to understand when you can and should spend money even before you see the month end figures. That is what good business is about.

Right, let’s get down to the business balance sheet.

The Balance Sheet Defined

Simply put, your business balance sheet will show you the financial position of your company at a given point in time. Now how much more useful can it be?

A balance sheet lists the company’s many assets, all the claims against those assets and then balances them.

This will then show the financial strength or weakness of the business.

Balance Sheet Periods

This will depend very much on the type of business we are talking about and are best decided based on the industry norm.

When starting out in a new business however, I would suggest that for your first year in business you project your business balance sheet on a monthly basis and then at least quarterly thereafter. Discuss this with your bookkeeper or accountant.

What’s in a Balance Sheet?

Balance sheet contents are designed for the specific business covered but all contain similar components.

As an example let’s look at the actual year end business balance sheet of a furniture manufacturing company.

As you can see, the total assets are balanced against the Total Liabilities and Equity, hence the name Balance Sheet.

To make a business balance sheet more meaningful it could and normal does contain the budgeted figures and percentage of budget columns as shown below:-

ASSETS

Current Assets

A monthly balance sheet would be identical but for the figures and twelve months figures would make up the year end balance sheet.

Reading the Balance Sheet

If you don’t understand the meaning of your balance sheet, why have one?

Understand your business balance sheet and you will soon understand what needs to be done to start generating value for you and your shareholders. Here’s why.

A balance sheet will tell you if your business is capable of funding its own growth or needs to take on debt.

Do you have too much inventory (stock) and are you getting in the money owed to you by customers in time?

Understand your business balance sheet and you will have all this information at your finger tips.

Let’s have a look now at the components of a balance sheet.

Current Assets

Anything that can be converted to cash within the business year.

Includes:-

• Cash. Money in the bank or the equivalent.
• Investments that are short term, like bonds.
• Accounts Receivable. All monies owed to the company by customers who have bought on credit.
• Inventories (stocks). All raw materials, work in progress or finished products that are ready for sale.

  Remember that inventory ties up capital so don’t over stock.

• Prepaid Expenses. Anything that has already been paid for. Down deposits or pre-payments for advertising or marketing expenses are prepaid expenses. Generally a good thing.

Fixed Assets

Anything that is not liquid and can’t be converted to cash quickly and easily.

They are assets used to operate the business, such things as land, buildings, vehicles, plant and equipment etc. are fixed assets.

• All of these items are subject to depreciation on the books.
• Will include intangible assets such as goodwill, patents, franchise rights and other items.
• Other assets are where you put those items of a fixed nature that you don’t know where else to put, such as life insurance.

Here is where you start the other side of your business balance sheet.

Current Liabilities

All that you owe to your creditors and suppliers, form part of your current liabilities. By current we mean due and payable within one year.

• Short-Term Notes Payable. Includes bank credit repayments and any long-term debt repayments falling due.
• Accounts Payable for all raw materials, goods and services, wages, salaries etc.
• Accrued Expenses. Work you have had done or money that you owe but not yet paid. This could be for income tax, unpaid overtime due, stock holders dividends and periodic distribution expenses etc.
• Long-Term Debt. If you owe interest on money which is not due yet, this is where it will go.

Only two items, really one, to note here

• Common Stock. All the shares in a business normally held by the founders or management. The value shown is the amount paid to acquire the shares and not the actual value. Recorded purely for accounting purposes, why?
• Retained Earnings records the total cumulative amount of capital earned by the company since it started less any and all dividends paid out to the shareholders.

  This is the one to note. Here is where you take profit!

Using Balance Sheet Ratios

Here is how to get some meaning out of your business balance sheet that will help pay you back for all the hard work.

A business balance sheet is full of clues to how well your company manages its assets and it is well worth spending some time on measuring your business based on a number of ratios.

Here are the basic ones:-

• Current Ratio will show the amount of liquidity, that is, assets in the form of money or that can be converted easily into money, that your company has available.

  Current Ratio = Current Assets divided by Current Liabilities

  For example, our balance sheet for year one gives a current ratio of

  705000 = 1.57

  449750

  Any current ratio of 1.5 or greater is considered good enough to meet the operating needs of the company in the near-term.

  You don’t want the ratio too high for this shows that you are not properly using the company assets to grow the business

  By the way, in year two of our business balance sheet, the current ratio is 2.3, those assets could be working harder!

• Quick Ratio. Here we look at the liquid assets of a company less its inventory (stock). Why you might ask, well inventory can tie up liquidity and you can’t run a company on inventory.

  Quick Ratio =Current Assets - Inventory divided by Current Liabilities

  Our example shows the following for years one and two.

  0.54 and 0.98

  As a quick ratio of greater than 1.0 is required to ensure enough cash on hand to keep the business going, both these years show a potential cash problem caused by too much inventory. Turn your inventory over quicker!

• Working Capital is the life blood of a company. Having positive working capital lets a business grow by having at hand sufficient money to buy for growth.

  Working Capital = Current Assets – Current Liabilities

  Year one + 255,250

  Year two + 567,750

  As both years are positive our company has sufficient in liquid assets to fund growth.

  If your working capital slips into the negative, with liabilities greater than current assets, you will be in deep trouble. Watch working capital carefully.

There are of course many more ratios that can be applied to the business balance sheet and if your accountant can convince you that you need others, humor him or her and say yes.

With the use of current and quick ratios plus a check on your working capital, you will have all you need to keep you informed and the business growing.

Get a business balance sheet prepared every month, understand it and then apply your ratios to check your direction. Are you going the right way?

The business balance sheet tells all.

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