Understanding your company’s financial reporting is a vital step towards getting your business’s finances under control. Only then can you see where the issues are and deal with them.
You might look at your profit and loss report (P&L) – but this only tells half the story. Your balance sheet provides a comprehensive snapshot of your company’s financial health at a single point in time, helping you make better-informed financial and strategic decisions.
Let’s explore what the balance sheet is, how it works and why it’s such a vital report.
1. What is the balance sheet?
A balance sheet is a financial report that lists everything your limited company owns, everything it owes and the net value left for shareholders at a specific point in time.
In accounting speak, these three elements are known as assets (what you own), liabilities (what you owe) and equity (the net value of the business).
2. What does the balance sheet measure?
The balance sheet measures your business’s overall net worth and structural solvency. Unlike the profit and loss (P&L) report – which tracks revenue and expenses over a month or year – the balance sheet shows your cumulative wealth since the company was incorporated.
3. How does the balance sheet work?
The statement balances according to a fundamental accounting formula:
Assets = Liabilities + Equity
- Assets: Fixed assets (machinery, vehicles, IT equipment) and current assets (cash in the bank, stock, unpaid customer invoices).
- Liabilities: Current liabilities (due within 12 months, such as VAT, corporation tax, supplier bills) and non-current liabilities (long-term bank loans).
- Equity: Capital invested plus retained profits left in the business.
4. What does the balance sheet tell you about your financial health?
Your balance sheet reveals whether your business is solvent and liquid – in other words, that you have money and can access that money in a liquid (spendable) form.
By comparing current assets against current liabilities (the current ratio), you can quickly see if you have enough short-term liquidity to pay upcoming bills and tax liabilities without panicking.
5. How to improve your financial position
To strengthen your balance sheet and improve your overall financial position:
- Tighten credit control: Try reducing your overdue debtor days to convert unpaid invoices into liquid cash.
- Optimise stock levels: Clear any slow-moving inventory items that are tying up capital unnecessarily.
- Retain earnings: Leave a portion of your post-tax profits in the business rather than drawing everything out as dividends.
- Restructure debt: Shift short-term borrowings into more manageable long-term arrangements with your lenders to improve working capital.
Keeping you in total control of your finances
Regularly checking your balance sheet and P&L gives you full visibility of your business’s financial health, profits and expenses
If you like to take a deeper dive into your financial reporting, come and talk to our team. We can tailor your reporting and financial KPIs to the exact needs of your business.
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