Transcript The Balance Sheet - The Cotswold School

The Balance Sheet
Asset Structure
The firms ‘asset structure’ depends on the nature of the business, for example;
•
Service industries: Often have a very low level of fixed assets.
Example 1- organisations providing internet related services have very
small fixed assets (the only major ones being computers and related
equipment).
Example 2- retailers have large amounts of assets tied-up in working
capital (especially stock) and debtors may figure strongly- why?
•
Manufacturers: Have larger fixed assets. Stocks (such as work in progress and
raw materials) are also quite high.
Other factors affecting asset structure:
•Stage of development of Co: e.g. Microsoft began in a garage.
•Trading conditions: if D is low in ST; stock will rise
•Production techniques: e.g. lean production methods.
•External change: e.g. if recession looms, firms will increase cash.
Financing Assets
To buy assets, firms must incur a liability (WHY?) or use retained profit. The sources of
finance used depends on those available and how risk adverse the owners are.
Working Capital (or net current assets)
= current assets – current liabilities
If Current Assets are too high with regard too Current Liabilities then either:
1. Too much money is tied-up in stocks (opportunity cost)
2. Too much money is tied-up in debtors (cash-flow problems)
3. Too much money is tied-up in cash (opportunity cost)
If working capital is too low firms may face liquidity problems, which could lead to
insolvericy.
Too increase its’ Working capital firms could….? (refer to syllabus)
What is a ‘strong’ balance sheet?
When assessing this it is worth considering:
1. Working capital: A firm needs enough of this to cover day-to-day running and not
have cash-flow problems. Acid test is a good judge.
2. Reserves: This is the net total of all retained profit from previous years. Rises or
falls, and this can say a lot!
3. Borrowing: see ‘Gearing’
4. Asset structure: e.g. Fixed assets should be financed by long-term finance,
otherwise payments will be due before you have received any return.
5. Trends: is working capital / borrowing / reserves etc. rising or falling.
The value of a business (summarise p41, Horner)