Your company accounts, the story of your business - Part 3 - The balance sheet

  • by Carole Jordan
  • 30 Oct, 2017
your company accounts, the balance sheet businessheads accountants brighton

Time for part 3 of your business story blog series! This time we'll be talking about the result of your profit and loss account - the balance sheet!

In my last two articles I covered the Profit & Loss Report and explained how they relate to the activities of your business over the period they cover. Understanding your Profit & Loss Report helps you understand your business better and will help you make more informed decisions to make your business more successful. At the end of the period you will have created something; you will have created a Balance Sheet!

So what is the balance sheet?

The Balance Sheet is a statement of the Assets and Liabilities of your business. The net difference between the assets you’ve created and the liabilities you’ve built up is called Equity. And, this is just like having equity in a home you own on a mortgage; it’s a value you have created for your future. On a Balance Sheet the Equity is usually profit which has been accumulated and remains in the Company.

The two most important categories of the balance sheet are  

Current Assets and Current Liabilities
These two figures reflect the Liquidity of your business, meaning the level of comfort you have in meeting your bills from the cash flow you have created. The higher your Current Assets the more resources you have available to meet your Current Liabilities.

Current assets will include two major components

Trade Debtors/Accounts Receivable
These are the balances your customers owe you at any point in time. Obviously your expectation is that they will turn into cash within a relatively short period of time, from 7 days to a maximum of 60 days depending on the nature of your business. 

Be sure to keep your customers paying promptly by employing good credit control procedures.

Bank and Cash Balances
The income and expenditure must be recorded accurately and the balance on your accounts reconciled monthly to the balance shown on the records help by your bank, whether that is a balance from your online banking records or from a statement. Retail businesses take payment immediately and so do not have to wait for their sales to turn into cash. Other businesses may take deposits from customers for future deliveries which will boost the bank balances but see below for the liabilities this creates too. 

Current Liabilities are usually the following 

Trade Creditors/Accounts Payable
The unpaid invoices from your suppliers for goods and services. Each will come with terms of payment and it’s important that you have sufficient cash flow to pay when due. 

Other Creditors. These can be;

Deposits held in anticipation of delivering goods or services
Take care to keep these separate and understand how much you are holding. This is not your money and should not be taken from your bank account until you have paid the costs of the sale. Many businesses have failed due to a lack of control over funds received in advance. When it comes to delivering the goods you must be sure you have enough to meet the bills. 

Taxes – VAT, PAYE and Corporation Tax
Each of these has to be calculated, recorded and paid for on time to avoid action by HMRC. The tax authorities have no tolerance of late payment and will act quickly to obtain payment even if it means putting your company into liquidation. Don’t go there, take care to accurately record these costs and pay on time. 

Staff Salaries
Once your payroll is run be sure to record how much is due to your staff. They are key to your success and wages payments must be made on time. Because there can be just a matter of days between running your payroll and making your salary payments be sure to budget for it in your short term cash flow planning. 

More businesses fail through lack of cash flow than lack of profit. The two can be connected but often become disconnected due to other demands in the business so stay hooked onto how well you can pay your suppliers, staff and taxes.


Next week is part 4, the final part in our blog series - The great thing about having equity in your business .

Check out the previous blogs in this series...

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