How to Read a Balance Sheet

More than a list of assets and liabilities, a balance sheet forecast is the key to planning a successful business.

More than a Summary

A balance sheet describes how well the financial condition of a business can support its trading operations. That's why the quality of the balance sheet forecasts you produce using Figurwizard are as important as the ones for profits.

Fixed Assets

Capital items not intended for resale, which are vital to business operations, describe fixed assets.

They are shown at “net book value” after depreciation has been deducted from their cost. With the sole exception of company cars the net values of fixed assets are always calculated from cost excluding VAT less depreciation. Cars however are calculated from cost including VAT less depreciation as VAT is not reclaimable as input tax for company cars.

Because fixed assets are not intended for resale, they play no part in calculating the liquidity of a business.

Current Assets

Sometimes known as "liquid assets" current assets represent the cash convertible nuts and bolts that support the trading operations of the business.

The principal current assets in order of importance are cash and cash equivalents, accounts receivable, stock / inventory of finished goods and work in progress. Maintaining efficient control of accounts receivable and avoiding having more merchandise on the shelf than is absolutely necessary are always crucial to maintaining positive cash flows.

Net Current Assets and Liquidity

Of all the entries in the balance sheet, this is by far the most important. Net current assets represent the working capital of a business, which broadly defines its liquidity.

If your Figurewizard balance sheet forecast shows a deficit for working capital, you must revisit your planned figures, either to eliminate the deficit by reducing overheads cutting down on investment, improving margins and either adding new capital or long-term debt. A forecast working capital deficit cannot simply be ignored.

To see our balance sheet forecasts in action, follow the link below.

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