I am bringing up the balance sheet again as we have been seeing some sets of accounts coming into our business with insufficient information to be a credible balance sheet.
I am seeing far too many prepared using the cash accounting system. I know this is not the easiest of documents to understand when you’re reading a set of accounts so I wanted to tell you some of the differences between a good balance sheet, and one that has been thrown together as a last resort.
I have been preparing and reading this document for a number of years and have seen all shapes and sizes. Part of my training was to read ones prepared by the FTSE 100 companies, not recommended. The financial statements can be complex and lengthy. But micro and small companies are done fairly simply so you don’t have to read 50 pages of detailed technical language.
Be sure that not only does the balance sheet contain information about the profit or loss you’ve just made during your trading year but has a number of components.
I would expect you to receive a detailed set of pages describing the different figures in the balance sheet. This doesn’t need to go to Companies House as small and micro businesses are abbreviated, but you should have a full copy that you can use for your business going forward, if you don’t you need to question this.
If you are going to sell your business or go to the bank to borrow money, you are going to need this important document. This is an accumulation of your whole trading history whether you’ve been trading for a year, or 50 years. A company that is 50 years old balance sheet will look different and may have complexities that a new business will not.
Components to expect.
Fixed Asset Register
There should be a summarisation of the fixed asset register detailing accumulative costs and deprecation and changes happening during the financial year. There should be a net book value at the end so you know the value of your assets. Fixed assets are your machinery, vehicles, refurbishment, furniture etc.
These can be patents, trademarks, goodwill. This needs to be highlighted in detail, with amortisation or not.
This can be money in the bank Trade debtors, customers that owe you money Other debtors can be prepayments, accrued income, if the company has loaned money to a member of staff etc.
Overdraft facility at the bank Trade Creditors, Suppliers you owe money to Taxation HMRC any of the taxes, Corporation tax, VAT, PAYE Other Creditors Accruals, invoices you havent received from a supplier, but paid, directors loan etc.
Long term liabilities
Can be bank loans, lease agreements, hire purchase. If these components are known to you and are not in your accounts, you must question this.
The balance sheet is a financial document that tells the reader the financial position of your business it is vital to be correct. It is even more important than a profit and loss, that only tells you one year timeframe.
Make your business a strong one, a weak set of information will not help you move forward, it can have the opposite affect and hold you back.
Its in your hands!