MANAGEMENT ACCOUNTS –NEVER IGNORE YOUR BALANCE SHEET
Our previous blog looked at management accounts and the benefits thereof. The one area of management accounts that we’ve found to be a bit of mystery for most entrepreneurs is the balance sheet and they often skip this important report. Unlike the income statement (entrepreneurs favourite report) which looks at your business’s profits, the balance sheet looks at the business’ wealth. So many decisions can be made by just looking at it, including the value of the business. In fact, it’s the first report that funders look at when considering funding your business as it enables them to evaluate your business’ risk i.e can your business afford additional loans or credit. From the balance sheet, they can also determine how their funding will be utilised and what returns they can expect in the future.
So what is a Balance Sheet
International Financial Reporting Standards (IFRS) calls this report a “Statement of Financial Position” (which is the term you will probably see when you look at your AFS). It’s a report that gives insight into the business’s financial position by breaking down the business’ assets, liabilities, and equity. From the balance sheet, you can see exactly what your business owns in terms of inventory, tools, equipment, vehicles, and property. It also lists what the business owes, for example in the form of loan repayments, lines of credit, salaries, outstanding inventory payments, or bond repayments.
Why keep an eye on the Balance Sheet?
The balance sheet cannot be ignored for a number of reasons.
1. Long term financial view
While the income statement is good at showing current results, making financial decisions based on the income and expenses alone can be detrimental. For example, say you have a good month and revenues shoot up. The income statement will show high revenue and high profits and give the impression that the business is in a healthy financial position. What the income statement will not show you though are all the outstanding supplier invoices that you still need to pay and the balance on your bank account. Cash is king…Always! And cash balance sits in your balance sheet. Go back to this article for more information on cash and cash flow management. To get a full picture of the business’ current financial standing in order to make a more informed decision, you need to have a look at your balance sheet.
TIP: When looking at your outstanding accounts receivable (debtors) and accounts payable (creditors) also look at the ageing analysis. This is a report that shows how long you are owed or have been owed.
2. Business risk
As an entrepreneur, you need to be proactive and not wait for outsiders to inform you about what is happening in your own business. If funders can study your balance sheet and identify business risks, then you should be able to do the same. Funders are also able to make reasonably accurate predictions about what the future holds for any business. They do not invent these numbers or ratios, as a business owner you should know these better. Request your accountant to explain the balance sheet numbers and important ratios of your business.
If this area of your management accounts is still an issue for you, take a step towards giving it the attention it deserves. As an entrepreneur, you must be able to read, understand, and analyse your balance sheet.
Please give out a shout here if you need more information on this topic and how we can assist your business
