Small Business Planning Pillar #6.3: Balance Sheet Statement (Forecast)
I’ll be honest with you, start ups always ignore their balance sheet statements in their small business planning..
And in a sense they’re right to. It’s just something else to have to learn and there’s so much else to do……….
However, balance sheet statements really aren’t that complicated to understand and the wealth of information they provide you with for such limited input is invaluable. For anything other than the very short term, switch “invaluable” for “essential”.
1. Current Assets
Anything that is cash or that can be readily converted to cash. e.g.cash, money owed to you (debtors), stock etc.
2. Fixed Assets
Anything your company owns that can’t be converted readily to cash. e.g. vehicles, property, production equipment etc
3. Current Liabilities
Anything that you could need to pay back in the short term. e.g. money you owe (creditors), bank overdraught, VAT, PAYE
4. Capital & Reserves
Capital refers to any shareholder investment whilst reserves are also known as retained profits. This is a cumulative record of all your company’s profits that have not yet been distributed either as dividends or invested back in the business.
The total assets (ie current assets + fixed assets – current liabilities) is then equated to the capital in the business and the two will balance – hence balance sheet statement. If not, try again.
The balance sheet statement produces a host of financial ratios which will help your small business planning and asses the state of health of your business. At the start up phase, many of these won’t be that interesting other than to your investors. However, to give you a flavour, here are a few:
- Current Ratio: (Current Assets / Current Liabilities)
This ratio highlights the solvency of your business. In other words it gives you an indication of your business’s ability to service its debt if required. A current ratio of 2 or more would be considered very strong whilst anything over 1 for an ambitious start up would be good. Less than 1 is not fatal but should flag a warning to you.
- Quick Ratio: ( Current Assets – Stock] / Current Liabilities)
Sometimes known as the “acid test”, this ratio is a more intense version of the Current Ratio. It measures liquidity by subtracting stock from the current assets before dividing by current liabilities. In other words, if your company needs to find some liquidity pretty quickly, this ratio gives you an indication of your capability to do so. Quick ratios vary from industry to industry but in general, anything over 1 is ok.
- Return On Capital Employed (ROCE) ( Net Profit Before Tax / [Total Assets - Current Liabilities] )
This ratio shows how hard the money invested in the business is working for you. In the short term during start up this is not particularly interesting. However your investors will certainly be interested. If your ROCE is 4% and they could get 5% by putting their moeny in a bank, then why take the risk with you?
Balance sheet statements can show us many more invaluable indicators as to the state of our small business. However, these take on greater meaning as the business moves towards maturity. For now, don’t spend too long worrying about balance sheet statements in your small business planning.
Just get on with the job.
……Small Business Planning Pillar #6.3: Balance Sheet Statement (Forecast)