Finance for Non-financial Managers

2. The Balance Sheet

The balance sheet gives you a picture of the company's financial strength at the end of the accounting period.

2.1 The balance sheet summarises assets (what you own) and liabilities (what you owe).

• Fixed assets (eg plant and machinery).Fixed assets are shown at their depreciated values. These include intangible assets such as licences and intellectual property rights.
• Current assets (short-term assets).This includes stock and work in progress inventory, debtors (customers who owe you money) and cash.
• Current liabilities (amounts you owe which are due for payment within one year).For example, trade creditors (suppliers you owe money to), bank overdraft and hire purchase.
• Long-term liabilities (creditors due after more than one year).For example, bank and directors' loans.
• Shareholders funds.This includes share capital (ie amounts paid into the company for shares) and reserves (including retained profit).

2.2 The total financing for the business is called capital employed.

Capital employed equals long-term financing (eg bank loans) plus shareholders funds.

• The figure for capital employed will always equal fixed assets, plus current assets, less current liabilities.

2.3 You may need to ask questions to get a clear understanding of what the balance sheet is telling you.

Like the profit and loss statement, the balance sheet reflects an element of judgement. For example:

• How quickly to depreciate fixed assets.
• How to value intangible assets (eg licences, where a value could be attributed but its validity would depend on the state of the market when the licence was sold).
• How to value stock and work in progress.
• What adjustments to make for customers who are unlikely to pay.