When thinking about a company's finances, often all the focus seems to be on the profit & loss account. Yet this is only part of the picture. The balance sheet reveals significant information about the state of financial health of a small company - and often it's only the balance sheet that appears on the public record, as most small companies take advantage of available filing exemptions to limit what gets filed at Companies House.
The balance sheet - essentially a statement of assets and liabilities - is also of particular interest to credit ratings agencies, banks and other lenders. In assessing the creditworthiness of a company, these operators pay close attention to what the balance sheet is saying.
It therefore makes sense for director/ shareholders to actively consider what can be done to strengthen and improve matters. I offer a few suggestions below.
1. Revalue assets
In most circumstances, the default position in small company financial statements is that fixed assets are shown at their historic cost, less a provision for depreciation. It is, however, permissible to show assets like land & buildings at "fair value" - basically their open market value. Revaluing such assets in an upward direction improves the strength of the balance sheet by increasing asset values.
2. Sell unproductive assets
If your company is holding onto underperforming assets - little-used plant or obsolete stock, for example - then it may be time to dispose of those items and reinvest into something that will provide a better return.
3. Capitalise intangible assets
Expenditure on intangible assets may be capitalised in certain circumstances. The alternative, expensing the cost through the profit & loss account, will by comparison result in lower reported profits (or increased losses). Potential examples include expenditure on software; property leases; and some development costs.
4. Monitor and manage working capital
Careful attention to the working capital position can strengthen the balance sheet. Click through to read more on working capital management.
5. Manage the timing of discretionery expenditure
Profit & loss accounts cover a span of time (normally a year); balance sheets, by contrast, are like a financial "snapshot" taken on one specific day. If your company has discretion over the timing of certain expenditure, consider when is the best time to incur that expenditure. By delaying expenditure until a subsequent financial year (which, if you are approaching the year-end, may mean a delay of only a few days or weeks), the strength of the balance sheet - not to mention the current year's profits - may be improved.
6. Deferred tax assets
If your company has trading losses available to carry forward against future years' profits, these normally represent value for the company as they can effectively help reduce future tax bills. Where it is more likely than not that the losses will be relieved in future periods, a deferred tax asset may be recognised in the balance sheet.
7. Convert debt to equity
It's not unusual for director/ shareholders to lend significant sums of money to their small companies, often on a long term basis. In some circumstances it is possible to convert such debt into equity shares, and in so doing remove the debt from the balance sheet without creating a tax charge for the company - or the lender. The money can still potentially be repaid at a future point when funds permit, for example through a share buyback.
8. Issue new shares
Of course, in some cases there may also be the possibility of further equity investment, either from existing shareholders and/ or other parties. Care must be taken however not to fall foul of the Financial Conduct Authority's regulations concerning financial promotions. The implications of potential changes in control or dilution of control also must be borne in mind, as well as a variety of other matters.
If you would like to discuss any of the above points, contact us today.