I would say that nowadays most business owners understand and regularly review their Profit and Loss accounts. However, how many on a quarterly basis review their Balance Sheet, or even fully understand the data!
So, what is a Balance Sheet?
This is a snapshot of the financial position of a business.
In a specific period, it summarises the value of a business, showing the assets less the liabilities.
Not only is this information vital for business owner to know it is also a requirement for all limited companies to prepare a Balance Sheet as part of their annual accounts they submit to Companies House.
Why does my business need a Balance Sheet?
In the UK, a balance sheet is essential for a business as it provides a clear view of its financial position, listing assets, liabilities, and shareholders’ equity. This document is particularly important for meeting statutory requirements since UK companies must submit annual financial statements, including balance sheets, to Companies House.
A Balance Sheet is also crucial for tax reporting with HMRC, helping ensure compliance and accurate record-keeping. Moreover, it’s valuable for attracting investors or securing loans, as it demonstrates the business’s financial stability, and helps UK businesses make informed decisions by tracking financial health over time.
What information is in a Balance Sheet?
The information within the Balance Sheet is a good indicator as to whether the business is solvent. Can it meet its financial obligations!
Information in the Balance Sheet includes:
- Assets (anything owned by the business, eg. machinery, property)
- Liabilities (all the money the business owes)
- How much Capital is employed in the business. (capital used in the specific time to generate profits) How it is financed (bank loans, director loans etc..) How quickly can the assets be turned into cash. (the potential sale of assets to increase cash flow)
The resulting figure then comes down to Net Asset Value (Assets less Liabilities). This figure is always equal to the sum of capital and reserves of the business.
If a business owner applied all their review process to the P&L account, they could be potentially missing that due to a weak balance sheet (low net asset value) the business could be financially vulnerable.
The HMRC have information about preparing annual accounts and What a Balance Sheet is. The HMRC have valuable resources for a business so it’s wll worth checking out.
Some points to remember on a Balance Sheet review
Is the business solvent, can it meet its financial obligations?
Even though it is required for an asset to have a value on the Balance Sheet, this may not be the market value of the asset.
The same applies for the value of the business, the Balance Sheet does not reflect the market value.
So, the aim of a Balance Sheet review is to understand the financial strength of business.
Reviewing the Balance Sheet and Profit & Loss regularly
It is imperative for a business to thrive that a regular review of the BS and P&L is completed.
A business could be generating a healthy profit but be considered to be financially weak due to a low net asset value. On the other hand a business could have a strong balance sheet and showing poor profitability.
How can Tandem help me with my business Balance Sheet?
We have more information around this in our regular Blogs, including:
If you wish to discuss further regarding reviewing your Balance Sheet please book a discovery call.