Balance sheet budget
Firstly, your balance sheet is a snapshot at a point in time, showing the assets and liabilities of the business. Many business owners find it more difficult to get their head around the balance sheet, as it often contains a lot of accountancy terms – fixed assets, intangible assets, trade debtors, other debtors, net current assets, etc. In simple terms it shows whether the assets and amounts owed to a business are greater than what it owes. It is always a good idea if assets exceed liabilities!
However, preparing a balance sheet budget helps put targets to a number of key areas. For instance, you may be thinking about buying some new equipment or a new vehicle. This will add to your fixed assets, but it may cause a decrease in other assets such as your bank balance, or an increase in liabilities such as a bank loan. The purchase of the asset won’t appear in your profit and loss account, so there may be a disconnect between what your profit and loss shows and your cash position.
Here is another example of why your profit doesn’t always mean extra cash. Let’s go back to our restaurant example. The owner is running at break even and decides he wants to get higher spending clients through the door in the expectation that it will increase profits. He decides that one of the ways of doing this is to offer a better wine list. He buys a stock of vintage wines in anticipation of his new clientele. Assuming he doesn’t get unlimited credit from his wine supplier, he may have to spend the cash before making any sales. On his balance sheet, he is initially just swapping one asset (cash) for another (wine).
If he doesn’t attract his new clientele and doesn’t manage to sell any of the vintage wine, then his cash has gone down even although his profit hasn’t changed. When preparing a balance sheet budget, what you are really doing, is setting a target for the financial strength of the business i.e. its excess of assets over liabilities. Within these numbers you are also setting a target for the scale of individual elements. For instance, what level of bank debt are you comfortable with?
In order to keep up to date with our latest posts please sign up to our blog for automatic updates. Alternatively subscribe for our free online resources here.
If you have any questions concerning budgeting for your business or anything else that you think you might need help with, give us a call on 0131 220 0152 and we will be delighted to help.