Assets for your balance sheet: Simply explained with 3 easy to use tips

When it comes to assets for your balance sheet.
 
I goofed. 
 
And whilst we are being direct,
 
It was a mistake that was easy to avoid.
 
I walked straight into it.
 
And it means I’ve got to explain what’s been going on late at night for the past 22 weeks.
 
But by the time you’ve read this email, you’ll want to do 1 of 2 things:
 
  • Pick up the phone and call me.
 
  • Throw this article straight into the bin.
 
Why?
 
Because this article will help you get even better results.
 
 
And find some cash (you know, the cash that’s been hiding as “profit” on the profit and loss all this time. Yet you’ve not seen a penny of it).
 
Let me explain.
 
You see, some people think I’m crazy.
 
That’s because people tell me I’ve got a unique ability to see the opportunities that exist in a business like yours.
 
And that I find a way to communicate clearly. So that you have complete clarity over what you should be doing next.
 
People like Zoe Cooke, who definitely thought I was crazy.
 
She said “The advice you gave me was, without question, the telling difference between success and failure of our clothing business. Truly brilliant stuff.”
 
This may come as something of a surprise.
 
You see, it’s finally possible for your business to dramatically increase the amount of cash it makes over the next 6 months.
 
Without making any extra profit.
 
Let me explain.
But first, let’s talk about assets.

What are assets?

What are assets?

What are assets?

Assets are things that a person or a business owns that have value.
 
Examples of assets are cash, property, equipment, and investments. It also includes something called accounts receivable (money that people owe the business).
 
Otherwise known as outstanding invoices.
 
Assets are important because they help a business to operate and grow.
 
For example, a business can use its assets to buy new equipment, pay for rent or salaries, or invest in new projects.
 
You can also use them to release cash. If the bank balance is getting low, you can chase the outstanding invoices, sell off some of the stock or sell a property for example.
 
You record the value of a business’s assets on its balance sheet.

What is the balance sheet for?

 

 

Cash.
That’s what a balance sheet is for.
 
Where a profit and loss statement helps you make more profit.
 
A balance sheet helps you turn that profit into cash.
 
I know what you’re thinking.
 
“Can all companies turn their profits into cash? How can a business make a profit and not have any cash?”
 
Take a look at this:
assets for balance sheet

Assets for the balance sheet

 

Take a look at the Profit and Loss on the left-hand side.

In 2019 this company made £1.5 million in Net Profit (that means profit after tax).

But in the same year, over on the balance sheet (right-hand side), you’ll notice something strange.

The cash at bank (or bank balance) has stayed the same.

So where has the £1.5 million gone?

Here’s what’s scary.

Almost every business we’ve ever gone through a balance sheet with, has the same problem.

They don’t know why the profit hasn’t translated into cash.

And here’s an even bigger problem.

There are two main types of accounting systems.

A cash system, or an accrual system. (An accrual system means that you pay tax when you invoice someone, rather than when the cash hits the bank).

If you are on an accrual system (which lots of small businesses are) you have to pay TAX ON THE PROFIT.

Yes, that’s right.

Tax on the profit that you don’t even have the cash for.  

So with the example above, they’ve done a great job making profit.

But an awful job turning that profit into cash.

And now they have to pay tax.

And their bank balance isn’t big enough to pay it.

They’d better get a move on.

And quick.

Which is why they called their business coach.

And asked them the question.

“Where has the money gone?”

There are a few different places that it could have gone.

First, there’s:

Debt.

If the company has taken on debt, you may use profits to repay the debt.

That can result in a decrease in liabilities (which means things you OWE).

Which is still helpful.

Then there is:

Retained earnings.
Retained earnings shows the accumulated profits of the company that you didn’t pay to shareholders as dividends.
 
Property, Plant, and Equipment (PP&E).
You can use Profits to buy new equipment. They’ll show on the balance sheet as “fixed assets.” That means things that you OWN and will still own 12 months from now.
 
Other assets.
Remember, assets is a posh word for things that you own. Other assets might be vehicles, or they can be intangible (or invisible) assets. Things like patents or your brand are intangible assets.
 
Paid as dividends.
If you pay lots of the profit out as dividends then that won’t show in the balance sheet. The cash position on the balance sheet won’t show any cash that’s left the bank account to pay you.
 
But only one of them shows where the £1.5 million in our example went.
 
And that was the debt reduction.
 
If you look at the short-term debt, they reduced it by £300,000.
Debt changed on the balance sheet

Debt changed on the balance sheet

 
So now we only have £1.2 million to find.
 
And it’s in the 3 most common places for business owners to lose their cash.
 
That’s right.
 
When you haven’t turned profit into cash.
 
It’s lost.
 
Somewhere in the balance sheet.
 
And the other 3 area’s that cash might wind up have a name.
 
It’s a name you should remember.
 
Because the same is more than likely happening to you.
 
The name is:
 
Working capital.
 
Roughly translated.
 
Into English means…
 
Cash that’s tied up in your business waiting to get out!
 
So here are the 3 areas that make up working capital.
 
First, we have:
Accounts receivable.
In English, that means “outstanding invoices.“
 
If you do a great job of completing lots of work within the year, then don’t chase the invoices.
 
You messed up.
 
And now your balance sheet is sad.
 
Which means your business is crying too.
 
So be diligent when chasing your invoices.
 
Take a look at your balance sheet.
 
Are the invoices that are outstanding (or accounts receivable) climbing every month?
 
If so, your marketing, sales, and operations teams are all doing their job.
 
But finance is NOT.
 
It’s their job to turn those profits into cash.
 
Next up on the working capital crazy train is:
Accounts payable.
 
That also means outstanding invoices.
 
But this time it’s invoices that you owe to suppliers.
 
Your debt. At least the debt that isn’t a loan.
 
If this is climbing, it CAN be a good thing.
 
As long as you’re not annoying your suppliers.
 
There’s a fine line here.
 
You don’t want to pay all your suppliers the same day they invoice. That’s even more relevant if you aren’t getting paid as quick by your customers.
 
But you also don’t want to delay payments so much that you annoy all your suppliers and they put you on stop.
 
So find a nice balance in the middle.
 
The more you delay these, the more it puts cash BACK into your bank account.
 
As it did with the £1.5 million but we’ll take a look at that again in a minute.
 
Then there’s the 3rd area of working capital.
 
And it differs depending on what business you are in.
 
If you’re a business that sells products, it’s called:
INVENTORY (a posh word for your stock).
 
And if you’re a service-based business, it’s called WORK IN PROGRESS. Which means work that you have in the pipeline, but it’s work you’ve not finished.
 
When you finish it, you can invoice, and then it moves out of work in progress and into accounts receivable (outstanding invoices).
 
Some companies have both.
 
Lots of construction companies have work in progress and inventory. So take that into consideration.
 
If you do have both it means you have 4 areas to manage instead of 3.
 
Now let me paint a picture.
 
Your business does £1 million in profit.
 
But your inventory has grown by £500,000.
 
You have an extra £400,000 in outstanding invoices.
 
And you have an extra £100,000 in work in progress.
 
That’s your £1 million in profit, all tied up in working capital.
 
You’re going to be in the same position as our friends that lost £1.5 million.
 
So it’s vital that you have someone in the business that’s reducing those key areas.
 
And it’s also vital that you are checking in on the balance sheet and monitoring the progress.

Where did the £1.5 million go?

Now you’ll be able to find it much easier.

We already spotted the £300,000 that reduced debt.

Now we just need to find £1.2 million.

So take a look below at the area’s of working capital that we discussed.

Let’s start with accounts receivable (outstanding invoices) and inventory (stock).

Assets on the balance sheet

Assets on the balance sheet

You’ll see there’s an extra £1 million in accounts receivable (or outstanding invoices).
So now we only need to find £200,000.
But there’s an extra £700,000 in the inventory (stock).
So now we are at -£500,000 to try and find.
How can we end up in a positive position?
By a huge amount.
£500,000!
And most importantly, where the hell is the £500,000.
Well fear not, it can be explained with the one remaining area in working capital.
Accounts payable.
That means invoices that you owe to suppliers.
And if you take a look below, there is exactly half a million in accounts payable.
Liabilities on the balance sheet

Liabilities on the balance sheet

Now, as the owner or CEO of the business.

You know how to find the cash that’s held up in the balance sheet.

You’ll also understand what we use a balance sheet for.

All that’s left, is to understand the terms.

If you can figure out what the language on a balance sheet means, it’s so much easier to read.

So here goes.

 

Definition of the things that sit on a balance sheet

Here’s the funny thing.

A balance sheet would be really easy to read if the language was simplified.

So here are all the items that sit on a balance sheet, with a translation.

That way you can understand how to read a balance sheet and why it’s so important.

Cash at bank

Your bank balance. Simple one to start us off.

Accounts Receivable

Your outstanding invoices. Your bookkeeper should move the work here once you’ve raised an invoice.

Inventory

Stock. This shows how much stock and materials you are holding. It’s important to do a regular stock count to make sure this figure is accurate. Ideally once a month.

Work In Progress

Jobs that you are working on, that aren’t finished. When you finish them and raise the invoice, they move out of work in progress and into accounts receivable. Most companies have to record these manually. They won’t automatically show up on your accounting software. So if you want an accurate balance sheet, you’ll need to ask your bookkeeper to add it manually most of the time.

Current Assets

Things that you OWN, but won’t do in 12 months. Things like cash, outstanding invoices, and stock fit here.

Fixed Assets

Things that you OWN, and will still own in 12 months. Things like property, vehicles, and other business investments sit here.

Total Assets

Simply add your current and fixed assets together.

Short Term Debt

Loans that are current and need paying in the next 12 months. Often if you have a large loan that has a longer repayment schedule than 12 months, your accountant would calculate how much of the loan you will pay in the next 12 months and that would go here.

Accounts Payable

Outstanding invoices. These are the invoices that your suppliers have sent to you and that are waiting to be paid.

Current Liabilities

It’s the result of your short-term debt and accounts payable. It’s the debt that you owe that will likely not be debt in 12 months.

Long Term Debt

Debt that WILL still be due to repay in more than 12 months. Usually bank loans.

Long Term Liabilities

All of your long-term liabilities are added together. Anything that’s longer than 12 months.

Total Liabilities

Add up your current liabilities and long term liabilities to get this number.

Equity

Just like working out the equity in your personal property or family home. You work out what the assets are worth (the house).

Then you work out the liability or debt (the mortgage).

And calculate the difference.

So if you have a house worth £750,000 and the mortgage is £250,000, you have equity of £500,000.

It works the same on your balance sheet, work out the assets, minus the liabilities and you’ll have your equity figure.

Your equity should be the same as the equity you had last year plus the amount of profit you made in the same period.

So if you had £1,000,000 in equity on the balance sheet last year.

Then you make £500,000 in profit this year.

Your new equity number should be £1,500,000.

That way, the profit and loss statement, and the balance sheet, both BALANCE.

 

Summary

Now that you know what assets are.

And what a balance sheet is for.

You can finally use it to get some of that cash out of the balance sheet and into your bank account.

But it’s important that you review your balance sheet each month.

Check to see whether the amount of cash being held in “working capital” is climbing or not.

If it is climbing, you need to pull your figure out and take action.

Start chasing the outstanding invoices.

Reduce the stock.

Get the work completed so you have less tied up in “work in progress.”

And then, you might even be able to book yourself a holiday.

Or re-invest some cash back into the business.

Maybe it’s time to pay yourself more.

Either way, you deserve all the success that a profitable business can bring.

So go get ’em team.

 

Let us know below, what do you currently do to improve the bank balance when things get tight?