What Your Balance Sheet Says About Your Business
“It sounds extraordinary, but it’s a fact that balance sheets can make fascinating reading.” (Mary Archer)
A balance sheet reveals a company’s “book value” by showing what assets it owns, what liabilities it owes, and the equity or net worth attributable to its owners, at a specific point in time.
Because all resources or assets are either funded by borrowing (liabilities) or owner investments (equity), the fundamental accounting equation that underpins the balance sheet is:
Assets = Liabilities + Equity.
Key components of a balance sheet
- Assets are resources controlled by a company that are expected to generate future value. These include current assets, such as cash, accounts receivable, and inventory; and non-current or long-term assets such as property, equipment, trademarks, and patents.
- Liabilities are obligations the company owes to external parties. These include current liabilities, such as accounts payable, payroll and short-term loans, and non-current or long-term liabilities like bonds, leases and deferred tax liabilities.
- Owners’ equity represents the net worth of a company after liabilities are deducted from assets and includes retained earnings and contributed capital, among others.
What your balance sheet says about your business
The balance sheet is an important tool for evaluating your company’s financial health and operational efficiency.
By providing an overview of the assets and liabilities of the company and how they relate to each other, the balance sheet can help answer questions such as whether your company has a positive net worth, whether it has enough cash and short-term assets to cover its obligations, and how indebted it is compared to its peers.
The balance sheet will show when a company is borrowing too much money, if the assets it owns are not liquid enough, or if it has enough cash on hand to meet current liabilities.
For this reason, balance sheets are also used to secure capital, private equity funding, business loans or bank finance, as they allow stakeholders to assess the financial health of a company, its solvency, and its ability to repay short-term debts.
Using your balance sheet for better management
Business owners and managers, as well as other stakeholders such as lenders or investors, can leverage the balance sheet alongside other financial resources to enhance decision-making and performance.
When analysed over time or comparatively against competing companies, a balance sheet can reveal ways to improve the financial health of a company.
Financial ratios are important tools that draw data directly from the balance sheet and other sources and are used for fundamental financial analysis. Some common ratios include:
- Liquidity and solvency ratios show how well a company can pay off its debts and obligations using existing assets. They also allow for monitoring long-term liabilities to maintain sustainable debt levels.
- Financial strength ratios, such as debt-to-equity ratios, measure the relative proportion of debt and equity used to finance a company’s assets. A higher debt-to-equity ratio shows that a company is more heavily financed through debt, showing an increased leverage. These ratios indicate how financially stable a company is and how it is financed.
- Activity ratios focus mainly on how well the company manages its operating cycle, which includes receivables, inventory, and payables. These ratios can provide insight into the company’s operational efficiency.
The balance sheet can also contribute to planning for growth, for example, by showing if the company has the assets, resources and capacity to expand, or if reinvestment or additional funding is required.
We can provide and interpret your financial reports
A balance sheet is an invaluable strategic management tool – provided you know how to interpret it.
We can provide your company with this important business tool (along with other key financial reports such as your income statement and cash flow statement).
Building a Business: Should You Bring in Funders or Go it Alone?
“As an entrepreneur, one of the biggest challenges you will face will be building your brand. The ultimate goal is to set your company and your brand apart from the crowd.” (Ryan Holmes, Founder and CEO of Hootsuite)
Trying to get a business off the ground is challenging. Every step of the process requires a mountain of time and investment. Choosing between going it alone or involving others as partners or investors is a decision that should not be taken lightly. In this article we’ll break down the options available and take a look at the pros and cons of each.
- Going it aloneSelf-funding, also known as bootstrapping, is when a business owner goes it alone, providing all funding, time and energy themselves.
Pros of bootstrapping
Whether you’re finding the money from savings, or your monthly pay cheque at another job, bootstrapping is perfect for the entrepreneur who wants full control over their business. With no partners on board, all decisions are yours to make, and all the profits, achievements, and losses are yours alone.
Apart from the independence it offers, bootstrapping can also be easier. There’s no time spent filling in application forms or putting together pitch decks to impress would-be investors. There is also no accrued interest on the debt involved and no loss of equity in your own business. This makes running the business far simpler.
Cons of bootstrapping
On the downside, bootstrapping can be much slower. Each cent spent on the business needs to come from your own pocket and so necessary investments need to be prioritised from month-to-month. Things that are essential for success may need to wait another month – and this can mean your break-even point takes longer to arrive.
Bootstrapping also increases your chances of failure, as some expenses simply can’t wait if you want to make money. Bootstrappers are also more likely to become frustrated with the slow pace and give up.
- Tapping into venture capitalVenture capital (VC) is one of the most popular routes for finding funding in entrepreneurship. This is where a company or an individual provides funding to your business in exchange for a percentage of ownership.
Pros of VC
Venture capitalists are able to offer significant investment in the company and can often provide all the funding necessary to take the company from start-up to established business. What’s more, venture capitalists likely come with significant experience in business and a strong network of contacts.
Cons of VC
Working with venture capitalists requires that you give up some control of your business. This new partnership can create friction if the person who pays the bills doesn’t share your ideas of where the company should be headed. In some instances, their investment may even give them a majority stake and the dream you had of being your own boss might now be a thing of the past.
- Touched by an angel (investor)Angel investors are also happy to provide the financing necessary for your business to thrive. Unlike VC, however, they are typically looking to take a more background role and are hoping to cash in when your company has become established.
Pros of angel investors
Angel investors generally offer more flexibility than VC. They aren’t looking to get involved – they’re looking for business owners and ideas that stand a good chance of succeeding without their intervention. This means they’ll often provide funding to businesses others may not touch.
Cons of angel investors
Angel investors are looking for part ownership of the business and you should therefore expect to lose some of the equity in your company. Because they’re investing without getting involved, angel investors know they may lose their money. This means they are generally unwilling to invest as much time or money as a venture capitalist might, so you should expect to still do some of the bootstrapping yourself.
Remember that angel investors are interested in one day getting a big payoff. They are looking for that moment when the company can be sold or listed on a stock exchange. This means they may pressurise you to make decisions that aren’t necessarily in the company’s best interests.
- Borrowing from the bankAn old-fashioned bank loan is another way of bringing money into a business.
Pros of bank loans
Taking out a bank loan gives you the money you need to grow the business. You also do not lose any equity in your company.
Cons of banks loans
The interest on a loan can be problematic and over time may add up to a significant amount – often the cost of debt is much higher than the cost of giving away equity to investors. If the company fails, you may still be required to pay off the loan in your personal capacity. There may also be some trouble securing the loan in the first place: banks want to know that they are lending to people who can pay them back!
The bottom line
Accessing funding is a decision you should consider carefully. Ask yourself what you need from your business, what you can afford and just who you would be going into business with.
Your Tax Deadlines for January 2025
- 07 January – PAYE submissions and payments.
- 20 January – End of Filing Season 2024 for Provisional taxpayers & Trusts.
- 24 January – VAT manual submissions and payments.
- 30 January – Excise duty payments.
- 31 January – VAT electronic submissions and payments, & CIT Provisional Tax payments where applicable.
