The reality is that at least half of the items on the balance sheet are really only there for accountants, and don't matter much in the real world. However, the other half of the items are vital.
Understanding your business balance sheet is without doubt important. Our ethos is to ensure that we explain to clients technical accounting principles, facts and figures in plain English, practical terms. This way clients gain valuable insights without being bamboozled or overly bored! Get in touch to find out more about us and why we are a good fit for sme clients or get a quote straight away instead.
Things like tangible assets, goodwill, shareholders funds and net asset value are often only calculated once per year, and typically many months after the year end has closed. If it was important, you'd want to see it at least quarterly and probably monthly.
But there are a handful of numbers which are really useful when running a small business or analysing company books.
The ones to watch are the items most closely connected to cash (and indeed cash itself), such as :
Working capital comprises trade debtors (the amount owed to the company by clients), trade creditors (the amount owed by the company to suppliers) and stock.
I your trade debtor value is going through the roof, all of the hard earned cash that would have been generated by the business, is absorbed because you are effectively financing the operations of your clients.
Equally, if the company bookkeeper suddenly has a burst of activity and pays all of your contractors in one go, the decrease in trade creditors will cause a good deal of cash to be consumed.
Once cash has been properly considered, the other important part of the balance sheet for business owners is the company's debt position and in particular the value and status of any loans provided to the business.
On the balance sheet, a company’s debt is split between current creditors (for debts due within 12 months) and long term creditors. So that means if a company has a £2m loan it is repaying over 5 years, £400k will be in current creditors and the balance will be in long term creditors.
But the problem is that the current creditor figure also includes non-financing debt – things like taxation (i.e. corporation, VAT or PAYE due to HMRC) and trade creditors. So you need to have a good look through the notes to the accounts to separate these out.
Many healthy companies will run a relatively large current creditor balance, because there is no need to pay HMRC or suppliers before you need to. So here are a couple of quick checks that you can do to see if these components of debt look OK:
As the above suggests, it's one thing making the best use of cost effective accounts software, which is now excellent. However, this alone, without understanding the figures and using data the right way, means you may be missing out on important ways to improve your business and/or reduce risk.
At Accounts & legal we specialise in helping small businesses get the most out of technology whilst also passing on our experience, know how and ideas, all at very competitive prices.
If you haven't had a quote from an accountant recently or are thinking of changing accountants, why not try drop in to see us at our London head office or try our Instant Accounting Quote?