If you’re a sole trader or a small company, even though you aren’t legally required to have a balance sheet for tax or regulatory purposes, you may find them very useful to provide a clear overview of your financial status.
We previously showed you how to download your balance sheet from Xero, but once you’ve done that, do you know how to read it and what it is telling you about your business finances?
What is a balance sheet?
A balance sheet is a statement which shows the value of the assets & liabilities of an organisation at a precise point in time. It is a snapshot of the business at the end of the month, or at the end of the year, and will show on that specific date what the business owns and what the business owes.
It is called a balance sheet because the value of the Assets (what the business owns)will always equal the value of the Liabilities (what the business owes), but this is of course dependent on you having correctly completed your accounts!
Understanding the balance sheet will enable you to understand the financial position of your business.
What items can be found on a balance sheet?
Assets
Usually these will be split by current and fixed; Current Assets are money (cash or positive bank balances), or things that are ‘nearly cash’, i.e. that can be turned into money in the short term. This might include debtors (people who owe the business money) or stock (when it is sold).
Fixed Assets, by contrast and as the name suggests, stay in the business because they are needed to run the business on an ongoing basis. They therefore include things like property, vehicles, equipment and fixtures and fittings.
Liabilities
Your liabilities are the money that you owe to others, including your recurring expenses, loan repayments, and other forms of debt.
Current Liabilities are Liabilities that need to be paid within the short term(strictly speaking 12 months from the balance sheet date). Therefore, they would normally include Trade Creditors, Bank overdrafts, VAT and most other taxes.
Long Term Liabilities are therefore anything due for payment after 12 months, for instance a long-term mortgage or bank loan.
We’ve shown these headings in an example balance sheet below.
This balance sheet also tells us at first glance what the business is worth on paper, and in this case it is the figure at the bottom of £29,170.
This is sometimes referred to as the ‘Surplus Resources’ or ‘Net Worth’ of the business.
This is because the difference between the total of the Fixed Assets and Current Assets,less the total of the ‘external’ Liabilities i.e. the Current Liabilities and Long Term Liabilities is what is left as owing to the owners of the business.
Put another way, if all the assets were sold at their book value and all the liabilities were paid (£81,600-£52,430) the amount left, or ‘paper value’ of the business,is £29,170.
Who prepares a balance sheet?
If you’re not familiar with accounting, preparing a balance sheet could seem like an intimidating process and you might not know where to begin. If this is you, then you might want to enlist the help of an accountant (like us), either to help get you started or to save you the time and hassle of preparing them yourself.
How Blue Rocket can help
We can help you identify what you would classify as an asset and a liability, plus explain the other headings that you might need to include. Furthermore, if you’re having trouble balancing your statement, we can look for any errors,miscalculations or missing data to help you on your way to understanding your business finances.
In case you missed it, our Client Advisor Romano has put together a short tutorial showing how to find and download your balance sheet in Xero. Watch it again here, and please get in touch if you need any help or more information. Remember,your balance sheet is one of the most important financial documents you have and without a proper understanding of it, you could be making decisions that have a negative impact on your financial position.
To find out more about the management accounts services we provide, visit our Services page and For a 'no obligation' chat, call us on 01322 555442, or email happytohelp@bluerocketaccounting.com
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