Assets, Liabilities, and Equity
What Your Balance Sheet Tells You About Business Health
Assets
What Your Business Owns
Assets represent everything your business owns that has value and can be used to generate future income. They are typically divided into three categories: Fixed assets Current assets and Intangible.
Fixed Assets: Are tangible longer-term investments like property, plant and machinery, vehicles that can take time to liquidate but they are vital for driving the business forward over the long term. A strong base of fixed assets can be a sign that the business is well-positioned for sustained growth.
Intangible Assets: These are non-physical assets that have an identifiable value and lifespan such as trademarks and patents. Whilst these assets may have a value in a “sale” situation, when raising finance, most lenders discount them from the balance sheet.
Current Assets: These are assets that can be converted into cash within a year, such as cash in the bank, accounts receivable (money owed to you by customers), and inventory (stock) . Keeping an eye on your current assets is crucial for managing cash flow and ensuring your business can meet its short-term obligations. A healthy balance of current assets indicates that your business is in a good position to cover its immediate expenses and seize short-term opportunities.
Why Choose Navigate Commercial Finance?
At Navigate Commercial Finance, our approach is centred around understanding your business and tailoring financial solutions that align with your specific goals. With our extensive network of lenders, wealth of experience and commitment to ongoing support, we ensure that your business has the financial tools it needs to meet your strategic plan. Whether you’re looking to expand, manage cash flow, or explore new opportunities, we’re here to help you make informed, confident decisions every step of the way.
Liabilities
What Your Business Owes
Liabilities are the financial obligations of your business. They are also split into two categories: current liabilities (creditors <1 year) and non-current liabilities (creditors >1 year). When managed well, liabilities can be a powerful tool to unlock growth.
Creditors <1 year: These are short-term debts that need to be paid within a year, such as trade creditors (money you owe to suppliers), short-term loans, and accrued expenses (expenses that have been incurred but not yet paid). Managing current liabilities effectively allows businesses to leverage their position and keep cash flowing smoothly.
Creditors >1 years: These include long-term financial commitments, such as bank loans, mortgages, and bonds that are payable over a period longer than one year. Long-term loans, can provide the capital needed for major investments or expansion plans, enabling businesses to accelerate growth and achieve strategic objectives.
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Equity (Capital and Reserves)
The Value Left for Owners
Equity represents the owners’ share of the business after all liabilities are deducted from the assets. It includes share capital, retained earnings, and sometimes additional reserves.
Share Capital: This is the money that has been invested in the business by the shareholders. While raising equity can provide a substantial cash injection, it also dilutes the ownership of existing shareholders. This means that business owners have to give up a portion of control over their company, which might not be ideal for those looking to maintain decision-making power.
Retained Earnings: These are the profits that have been kept within the business rather than distributed as dividends. Retained earnings can be used to reinvest in the business, fund expansion, or pay down debt. Growth in retained earnings over time is a good indicator of a company’s profitability and effective management.
Assessing the Financial Health of Navigate Fabrics Ltd.
Given the financial details provided for Navigate Fabrics Ltd, we can assess its overall financial health:
Assets: The company has a solid asset base, with a healthy balance of £350,000in current assets (cash and accounts receivable) and £735,000 in fixed assets (property and machinery). This combination ensures that Navigate Fabrics Ltd. has enough liquidity to cover immediate expenses while supporting long term future income generation.
Liabilities: Navigate Fabrics Ltd. has strategically taken on liabilities to enable growth. The £40,000 short-term loan for marketing the new sustainable fabric line is expected to drive significant revenue, making it a valuable investment. The £250,000 mortgage supports long-term asset ownership, whilst spreading the cost over time to maintain stability. The company’s liabilities are well-managed, demonstrating a positive outlook on using debt as a growth tool.
Equity (Capital and Reserves): The company’s equity is robust, with £300,000 in share capital and £495,0001in retained earnings. This suggests that Navigate Fabrics Ltd. is generating profits and effectively reinvesting them to support expansion. However, it’s worth noting that raising additional equity would dilute existing ownership, making debt financing an attractive option for business owners looking to retain control while driving growth.
Take Action Today
Contact us today to see how our expert team can help you leverage your balance sheet for growth and navigate the complexities of commercial finance with confidence.