“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

1. 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.
2. 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. 
3. 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). We can also help you to understand and use these reports to make better business decisions, enhance financial health, and drive sustainable growth.

Disclaimer: The information provided herein should not be used or relied on as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact us for specific and detailed advice.

© AccountingDotNews

“In the business world, the rearview mirror is always clearer than the windshield.” (Warren Buffett)

Every business should conduct an extensive review of its business operations at least once a year. Doing a review allows you to track your company’s progress towards achieving its goals, to evaluate current strategies, practices and operations, and to determine what’s working and what isn’t. Think of it like going to the doctor for an annual checkup.

The benefits of a year-end review

A year-end review enables you to evaluate business performance across business functions and to identify trends and issues before these become serious problems.

It requires checking progress on goals, objectives and key performance indicators (KPIs). This will reveal what is already working well (these processes can be enhanced and replicated), as well as what is not working – prompting you to realign the team or change tactics. All of this empowers you to chart a well-informed plan of action for the year ahead.

What should be included in an annual business review?

For a big-picture understanding of your business’ performance across the various business functions over the last year, a multitude of factors should be reviewed. Luckily, we can help with putting everything together.

• Financial reports, including:
  • Annual financial statements and management accounts
  • Profit and loss (P&L) statement comparing total income to total expenses
  • Cash flow statement to identify cash flow problems and inform budgeting and spending decisions
  • Debtors’ reports enabling proactive management of current and overdue invoices for improved cash flow
  • Budget vs actual spending report to identify areas over or under budget
  • Balance sheet summarising total assets and liabilities, shareholders’ equity, investments and retained earnings
• Company vision, mission and values
• Business plan covering:
  • Market conditions, industry changes and competition
  • Client base, changing client needs and client satisfaction
  • Goals, objectives and KPIs (Key Performance Indicators)
  • Current and pipeline projects, new opportunities
• Human resources, key roles and employee satisfaction
• Customer acquisition cost and lifetime value
• Products/services, value proposition, quality, prices and fees
• Sales, advertising, marketing and branding
• Costs and expenses, including tax liabilities
• Internal systems and processes, equipment, and resources
• Statutory documents, registrations, certifications and contracts

The smartest way to benefit from a year-end review

Collating all this information may seem overwhelming, but with our professional assistance it can be done quickly and efficiently.

Our team will also assist you to understand the numbers and what the data says about your business. This insight will enable you to enhance or duplicate the processes that are already generating good results and to identify the changes necessary to obtain better results in other areas. It’s all about creating a solid plan for the upcoming year, so you can set your business up for greater success in 2025.

Disclaimer: The information provided herein should not be used or relied on as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact us for specific and detailed advice.

© CA(SA)DotNews

“If you talk to a top accountant about his field of expertise, it’s mind-boggling.” (Vincent Kompany, professional football manager and former player)

Accountants are the tax and compliance champions of any industry, but the best ones do so much more for their clients, as strategic advisors and trouble-shooters who can also assist with automating a variety of tasks and pave the way for the running of a smooth and profitable business. Here is a list of not-so-obvious services an accountant can assist with that will help your business thrive.

1. Setting up a new business

Setting up a new business comes with a number of potential pitfalls that may not be discovered until it’s too late. For instance, the type of business you choose to set up, be it a company, sole trader, trading trust or partnership will come with different tax requirements, paperwork and personal liabilities. Changing the kind of business vehicle at a later stage can be a costly process, so having an accountant assist you in ensuring you are starting off with the best entity for your business could make a huge difference.

2. Buying or selling a business

If you are thinking of either selling your business or buying a new one, your accountant should be your first stop. Accountants can assist with business valuations, form exit strategies, and get the right financial reports and documents together to ensure you only make good decisions. Your accountant will also help keep costs down and make sure you don’t find yourself on the wrong end of a bad deal.

3. Cash flow adjustments

One study performed by Jessie Hagen of U.S. Bank revealed that 82% of businesses fail because of poor cash flow management. There is, therefore, no doubt that not being able to meet financial obligations when you need to is certainly an indicator that things are not going well. The good news is that your accountant can help.

By conducting a thorough business analysis, your accountant may be able to rebalance your budget and debts, optimise your cash flow and build cash flow projections.  By simply showing you what needs to be paid when, organising cash reserves, and adjusting the way money is used in the business, you can avoid upsetting suppliers and staff and ensure your business operates as smoothly as possible.

4. Business operations

There are many decisions in a business that look like they may be simple, but the fact that they involve an element of finance makes them a critical task to take to your accountant. Accountants can help with analysing whether your equipment should be bought, or leased, whether offices should be rented and where, and whether the terms and conditions offered by one supplier are truly better than those of another.

Your accountant is also best suited to assist in pricing your products to make sure you are getting the most profit from each sale and maximising your potential client base. They will also be able to point to areas of under-performance in the business and suggest possible areas for expansion.

5. Cloud software

Your accountant is also able to help you automate much of your business’s monthly bookkeeping and set up an invoicing system that will tell you at a glance who has paid and who has not. This smart software can even send emails to clients to chase up unpaid invoices, all of which saves you time and keeps you on top of your finances.

6. Networking

Good accountants work with other good businesses. If you are looking for suppliers or even investors it can never hurt to chat to your accountant about what you need – you never know, perhaps they know the right person?

7. Securing financing

At some stage in every successful business’s life, there will probably come a time when additional finance is necessary. Whether it’s securing a loan that helps bridge tough times, or attracting investors for necessary expansion, getting this money will need well-structured and legible financials.

Your accountant is therefore the first person you should speak to. They can help you structure your investment pitches and loan applications in a way that investors prefer, showcasing your business and making your investment-seeking efforts more likely to succeed.

8. Stock management

It isn’t always easy to tell on a day-to-day basis if your stocks are being managed correctly. Fortunately, your books will reveal a lot to your accountant about what’s happening in your stock room. Are you ordering too much, and therefore spending too much on storage, or writing off a high percentage of obsolete or expired goods? Or is the opposite true and you are missing out on sales by not having the correct parts or products in store? Your accountant can look at the trends over time and reveal what changes need to be made to ensure you are operating at peak efficiency.

9. Long-term planning

An accountant can put long-term plans in place, which will ensure loans are paid off as efficiently as possible, staff are taken care of as well as possible within the business’s means, and that its systems and resources are set up to ensure the inevitable difficult times are as painless as possible.

10. Advice

Your accountant will no doubt be working with a number of other businesses in numerous different sectors. They may therefore be able to see the bigger picture. This together with their wealth of experience in business operations and in seeing where things have gone right and wrong in the past, makes them the ideal people to ask for advice or even get onto your board. Accountants will be able to help you make the right decisions to grow your business, pay off debt or point you in the best direction when you are struggling with a tough decision.

Ultimately, your accountant is so much more than simply your “tax guy”. By assisting you in every facet of your business your accountant can help you avoid a variety of frustrations and troubles and help you build a successful, well-oiled and streamlined business.

Disclaimer: The information provided herein should not be used or relied on as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your professional adviser for specific and detailed advice.

© CA(SA)DotNews

“Making good judgements when one has complete data, facts, and knowledge is not leadership – it’s bookkeeping” (Dee Hock, Founder and CEO of VISA)

When running a small business, it often feels like you are doing everything yourself, and some important tasks can slip under the radar. One aspect that should never be forgotten though is bookkeeping. While intimidating, keeping your finances in order need not be as hard as it sounds. Here are our tips for ensuring your accounts remain ordered and your peace of mind intact.

1. Ask your accountant
   If you want to keep things as simple as possible and guarantee you never run foul of the law, getting your accountant in to do your bookkeeping is the safest and most efficient way to do your books. Apart from being able to manage your finances, an accountant would be able to help save on taxes and advise you on areas of the business that may be streamlined.
2. Keep your personal and business accounts separate
   It may not seem like much, but mixing up which account pays for what can lead to hundreds of extra hours of work over the course of a year working out which deductions and expenses relate to your business. Rather keep personal and business accounts and banking separate.
3. Set up reminders for important deadlines
   Using an online calendar, it’s now easy to set up reminders for all those important tax and other deadline dates so you know when things are becoming urgent.
4. Keep receipts
   Be sure to keep all receipts to build a verifiable audit trail. Whenever you pay anything out to a supplier it’s important to get an invoice and file it away. Keep all your receipts for all business expenses and purchases. You never know when you may be hit with an audit and need to prove everything you have said.
5. Keep reports
   Every month generate a one-page document detailing all your income and expenditure. Ask your accountant to set up a simple monthly one-page report that, in addition, compares actual income and expenses to your budget. It doesn’t have to be detailed but should give you an idea of just where the money is going and what is coming in. As well as making bookkeeping easier, it will also help you track the growth and health of your company.

Disclaimer: The information provided herein should not be used or relied on as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your professional adviser for specific and detailed advice.

© CA(SA)DotNews