228 CHAPTER 10 FUNDING THE BUSINESS
Balance sheet headings
You have just looked at methods of producing balance sheets and cash flow from your
expenditure forecasts. Now is a good time to take a look at the entries that appear in bal-
ance sheets. You could, if you wanted, do the opposite and work through the balance
sheet pulling in entries from the transaction accounts and churning out the cash flow on
the side. Figure 10.1 shows the main headings on a balance sheet. To make sure that you
are familiar with them, I will run through each in turn. But first how long is long?
HOW LONG IS LONG?
Unlike other professionals, accountants consider the long term to be anything that is not
going to happen before their next pay review.
Current assets and liabilities are those which relate to the current year.
Long-term assets and liabilities relate to payments and consumption that will
take place after the end of the current year or operating cycle.
Jun Jul Aug Sep
Balance sheet, end month
Assets: prepaid rents 0 3000 2000 1000 0
Memo: change in month … +3000 –1000 –1000 –10000
Expenditure account, whole month
Salaries 12,000 12,000 12,000 12,000
Office rental payments … 1000 1000 1000
Other expenses 100,000 100,000 100,000 100,000
Total (including expenses not shown) 112,000 113,000 113,000 113,000
Cash flow related to expenditure,
whole month
Total expenditure brought forward –112,000 –113,000 –113,000 –113,000
Adjustment for rental payments – 3000 +1000 +1000 +1000
Net cash flow requirement –115,000 –112,000 –112,000 –112,000
BALANCE SHEET HEADINGS 229
CURRENT ASSETS
Current assets are those which will be converted into cash, sold or consumed within one
year. There are four categories:
1 cash at bank;
2 accounts receivable;
3 inventory/stock;
4 miscellaneous.
Cash at bank
This includes currency, demand deposits, certificates of deposits and other deposits
maturing within 90 days. You probably want to avoid forecasting this total until you have
developed your cash flow projections. Generally, you should aim to keep it as small as
possible, while providing adequate working balances. Cash in the bank is not generating
income in the normal course of your business.
Accounts receivable
This is revenue recognised in your profit and loss accounts, where cash has not yet been
received (you will have to deduct an allowance for bad debts). Essentially, the total bal-
ance on accounts receivable reflects the length of time that passes between recognising
sales and collecting payment.
Figure 10.1 A snapshot of the balance sheet
Current assets
Cash
Inventory/stock
Accounts receivable
Other (prepaid expenses, deposits paid …)
The left-hand side always equals the right-hand side: assets = liabilities plus owners’ equity
Current liabilities
Short-term loans
Maturing long-term loans
Accounts payable
Other (accrued expenses, taxes due …)
Non-current liabilities
Long-term loans and other borrowing
Pension fund
Non-current assets
Investments Owners’ equity
Fixed assets (plant, machinery …) Paid-in share capital
Natural resources Retained earnings
Intangible assets (patents, goodwill …)
230 CHAPTER 10 FUNDING THE BUSINESS
Inventory/stock
These are your holdings of raw materials, work-in-progress and finished products that will
be sold. You produced a forecast of these in Chapter 8.
Miscellaneous
This category is usually small, but it can be significant for a new business. It usually rep-
resents cash tied up in payments that you would rather not have made. Try to minimise
them. Two such categories, already discussed, are:
Prepayments. These are advance payments for goods and services – rent,
insurance, subscriptions. Although classified as current assets, they are often
ignored by bankers and others appraising your balance sheet because they are
generally unrecoverable.
Deposits paid. These are (supposedly) returnable sums payable when renting
premises, machinery, vehicles, etc. Beware that sometimes, especially in less
developed countries, it can be remarkably difficult to recover deposits.
LONGTERM OR NONCURRENT ASSETS
There are four main categories of long-term assets. It is common to hear all of these
referred to as ‘fixed assets’:
1 investments;
2 fixed assets;
3 natural resources;
4 intangible assets.
Investments
This is where you show your long-term minority shareholdings in other companies. Minority
is used loosely in this context. The opposite is where you exert a dominant influence over
another company (usually but not always through a majority shareholding) – in which case
the investment is not shown here. Instead, you will consolidate the accounts and have a con-
solidated balance sheet showing the total value of combined assets and liabilities.
BALANCE SHEET HEADINGS 231
Fixed assets
These are holdings of property, plant, machinery, equipment, etc. which were more-or-
less discussed to death in Chapter 9 (along with natural resources and intangibles). They
are shown at cost and also at their net value after deducting accumulated depreciation.
You bring in the totals for these amounts from your forecast of capital outlays.
Natural resources
The treatment of these was considered with our discussions of fixed assets (see above).
Intangible assets
These include R&D costs, patents, copyrights, licences and goodwill. Again, the treatment
of these was considered with fixed assets (see above).
CURRENT LIABILITIES
Current liabilities represent payments that you will have to make within one year.
1 Accounts payable (trade payables/trade credit). This reflects the grace period
that you can win between buying and paying for inventory, supplies and other
materials. Extend it as much as you can.
2 Short-term loans (bank loans, notes payable). These are short-term borrowing –
usually secured against inventory or accounts receivable – from banks and trade
creditors.
3 Long-term debt maturing in the current period. This reflects the obligations of
past borrowing coming home to roost.
4 Miscellaneous. As with assets, the miscellaneous category is not always as
‘unimportant’ as it might sound. It mostly covers payments that you know you have
to make, but which have not hit your cash flow yet. Three headings are as follows.
– Accrued expenses payable. This is recognition of expenses due but not yet paid
– discussed under accruals accounting in Chapter 7. Note that long-term accruals
such as those related to pensions belong – obviously – with long-term liabilities.
– Provision for taxation. The tax collector usually grabs your money as fast as
possible, but you tend to know ahead of time that you will have to pay up, and
you should make provision here.
– Deposit received. If you take returnable cash payments from customers, show
them here. Financial institutions take deposits in a different sense and have
special categories for deposits.
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