In the final part of our series of 5 Things Every Company Director Needs to Know at Month End, we’re taking a look at the balance sheet review. Understanding your balance sheet is another crucial element when it comes to assessing the financial health of your business and your bookkeeper plays a vital role in this process. Your balance sheet (or statement of financial position as it’s also known), gives you a snapshot of what your business owns (assets) and what it owes (liabilities).
Regular balance sheet reviews, guided by your bookkeeper, provide critical insights into your company’s financial stability, helping you make informed decisions to drive growth. By conducting this review monthly, you can stay on track with your financial goals and address any emerging issues swiftly.
Breaking Down the Balance Sheet - Assets vs Liabilities
Assets: What Your Business Owns
Assets are categorised as follows:
Current Assets: These are assets that can be easily converted into cash within the next 12 months such as your bank accounts, debtors and inventory. It’s important to keep track of your inventory through regular stock takes so you can maintain accurate records and assess its overall value.
Non-Current Assets: Also referred to as fixed assets, these are your long-term investments. Examples include your equipment, machinery, buildings and vehicles. Over time, these assets will depreciate in value.
Liabilities: What Your Business Owes
Liabilities are also split into two categories:
Current Liabilities: These are the obligations that are due to be settled in the next 12 months, such as your accounts payable and any short-term loans your business may have.
Non-Current Liabilities: These are the long-term debts your business has that extend beyond a year, like mortgages or long-term loans. However, the portion of these debts that are due within the next 12 months are categorised as current liabilities.
Equity: Measuring Your Business’s Net Worth
Equity is the difference between your total assets and total liabilities. Positive equity indicates that you have a healthy financial position, while negative equity could be a sign of potential financial difficulties. Monitoring your equity with the help of your bookkeeper is key to understanding your business’s true value and ensuring long-term financial stability.
A Closer Look at Key Accounts
Some of these might be familiar from previous blogs in this series, so let’s take a recap and also discuss other accounts you need to be aware of.
Debtors
These are people (or businesses) that owe your company money. Managing your debtors is crucial for maintaining healthy cash flow and ensures that your business has enough funds to operate without issue. Your bookkeeper will track these accounts to keep your cash flow steady.
Creditors
These are the companies or individuals that your business owes money to. It’s important to monitor your creditors so you can manage payments to them efficiently and maintain strong relationships with them too. Your bookkeeper can assist in keeping these accounts up-to-date.
Bank Accounts and Cash Flow
Monitoring your bank accounts and managing your cash flow is key for maintaining your company’s solvency. You can also use cash flow forecasts to prepare for future cash needs and ensure your business remains financially stable. A bookkeeper can provide insights and forecasts to help you plan effectively.
Clearing Accounts
Clearing accounts are used for transactions that are yet to be finalised. These include payments processed through services such as Stripe, GoCardless and SumUp, as well as payroll-related expenses. It’s essential to keep track of these accounts for accurate financial reporting. Your bookkeeper will ensure these accounts are correctly managed.
The Balance Sheet vs. Profit and Loss Review
Unlike profit and loss statements, which reset every financial year, your balance sheet carries over from year to year. This provides a long-term view of your business’ financial position and in turn, makes it a powerful tool for strategic planning.
In addition, whilst your profit and loss statements focus on your business’ income and expenses over a specific period, your balance sheet provides a comprehensive view of your financial position at a given point in time. But both are important to review as together, they give you a complete picture of your company’s financial health. A skilled bookkeeper can help you navigate these reports for better financial decisions.
Regular Reviews for Financial Success
Regular balance sheet reviews, guided by your bookkeeper, are vital for maintaining financial clarity as well as ensuring the long-term success of your business. By understanding what you own, what you owe and your overall equity, you can make fully informed decisions to drive your business growth and stability.
Are you a company director navigating the complexities of month-end financial management?
Don't worry, we've got you covered! Download our FREE guide: '5 Things Every Company Director Needs to Know at Month End' and gain the insights you need to streamline your month-end processes and drive business success.
You can also check out our YouTube series where our Founder, Kath Vincent, breaks down each topic in-depth.
Long White Cloud Accounting is based in Sutton, South London and serves established limited company service-based clients in the Greater London area. Led by Kath Vincent, we provide high-quality bookkeeping to keep you on top of what’s happening in your business each month. Looking for bookkeeping support? Click below to book a chat with Kath.
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