The Balance Sheet is the last of the big three financial reports we’re covering in this series. A balance sheet shows the value of the business in terms of:
- What the business owns
- What the business owes
Let’s deal with the obvious question first – why it is called a “balance” sheet, and why does it need to be balanced?
The balance sheet really is like the set of scales its name suggests. It has many uses, which I will discuss below, but at the core, it is a means of ensuring that all of the business’ activities are correctly accounted for. Think of the balance sheet like a set of scales with a list of items on each side of the scale. If the lists are not complete, the scales will not balance, and this means something is missing from the financial picture of the business.
What makes up a balance sheet forecast report?
This all sounds pretty academic so far. But the Balance is actually dealing in pretty down to earth information, albeit dressed up in some fairly opaque language. Without an accounting background, the following equation is hard to get your head around, but it’s what makes the balance sheet tick:
Assets = Liabilities + Equity
In other words…
What the business owns (Assets) equals what the business owes (Liabilities) plus the current value of the business controlled by its owner/shareholders (Equity).
These 3 elements, Assets, Liabilities and Equity, make up the 3 sections of the balance sheet.
The other thing that makes the balance sheet different to many other financial reports is that it tracks the value of things, rather than the changes in value. We’ll see some examples below…
Assets are the things that your business owns which have value. The most obvious assets are physical things – buildings, equipment, land, and fixtures. In addition to this, there are non-physical assets – cash, investments for example. Even things as ethereal as intellectual property and brand can be counted as intangible assets. The balance sheet below displays a normal set of asset classes – breaking down assets into two camps – non-current assets and current assets.
Also called ‘fixed assets’. These are assets that are not easily exchanged for cash. These are long-term holdings that the company has, that can, in theory, be sold but are not considered ‘liquid’. What a great bit of jargon! Liquid in this sense just means ‘easily transferable into cash’.
Non-current assets are split into Assets and Investments.
The assets line shows the current value of the assets the business owns. This value can go up if the company buys more assets or down if they depreciate or are sold/written off.
- The value of any property or premises that the company owns.
- The value of all the machinery or materials that are integral to business operations.
- The value of all items that are not permanently attached to the building or utilities.
The value of all the investments that the organisation has. These could be investments in stocks and shares or in projects outside of the business itself.
This is the total value of Inventory, Accounts Receivable and Surplus Cash.
Current Assets are reserves or property of the business that are easily exchanged for cash or are already realised as cash.
The goods that you have in stock that are ready to sell.
Any money that you are owed by those you do business with at the start of the month.
Surplus cash is the money produced by the business after taking into account the total income and outgoings. It’s ready cash that the business has immediate access to (the most liquid of liquid assets).
This is the total value of Non-Current Assets and Current Assets.
What can we learn from Assets?
Looking at assets show us a lot about a business. Beyond the obvious (the value of the business, disregarding liabilities), the split between non-current and current assets shows how ready the business could be to respond to a financial crisis, either internal or external to the business.
Liabilities are what the business is liable for- what the business owes or debts that the organisation is responsible for. These are split into Current Liabilities, which in general are owed within one year, and Non-Current Liabilities, which cover long-term debt like most loans.
The total of the Accounts Payable and Short Term Borrowing.
Accounts payable are the payments that the business owes to suppliers and other creditors.
This is the amount of cash the business needs to borrow to cover its short-term needs.
In Brixx, this is the total amount outstanding on all loans in the plan. Non-current Liabilities are long-term debts that the organisation owes.
This is the total debt or capital that the business owes at the given period.
The total of both the current liabilities and non-current liabilities.
This is the result of taking the total liabilities from the total assets.
What can we learn from Liabilities and Net Assets?
Liabilities on the balance sheet show us the makeup of the business’ debts. When compared with assets, the type and amount of liabilities on the balance sheet show the kinds of financial responsibilities the business has to shoulder and its ability to meet these demands with a mix of assets.
Equity is the value of cash and other assets invested into the business by external parties, including the business owner (for most business structures the owner is a distinct entity from the business itself. Find out more about business structure here).
The funds that have been added by the owners of the business or shareholders.
Retained profit is any profit (or loss) the business made up to the end of this month. Like other balance sheet entries Retained Profit is cumulative. If you retained a profit of £2000 last month and make a profit of £500 this month then your Retained Profit will be £2500 this month.
Balance Sheet Check
Finally, this ‘check’ line shows whether the balance sheet is balancing or not. In Brixx, all components automatically balance on the balance sheet – it’s only if you introduce existing assets or liabilities to the plan, either through components or through the Opening Balance page that the balance sheet can become unbalanced. If your balance sheet is unbalanced this suggests that there is something missing from the plan. Check Settings/Opening Balance to see a breakdown of the figures flowing through to your opening position.
The best way to get the full picture of the financial health of a business is by making a financial model that produces a cash flow forecast, profit and loss forecast and balance sheet forecast. These three reports each provide a different slant on the same core data, revealing much more about the business than any one single report of KPI would.