Balance Sheets

What is a balance sheet?

A snapshot of the business assets (what it owns and is owed) and its liabilities (what it owes) at a particular period in time.

What are the main components of a balance sheet?

• Fixed assets

• Current assets

• Long term liabilities

• Current liabilities

• Net current assets / Working capital

• Net assets

• Capital employed

What is a fixed asset?

Resources purchased for long term use by the business and are not likely to be sold for cash within 12 months.

Give some examples of fixed assets.

• Land

• Buildings

• Machinery

• Goodwill (intangible)

• Vehicles

What is a current asset?

Resources a business owns and expects to use or sell within a year.

Give some examples of current assets.

• Cash

• Debtors (receivables)

• Stock

What are current liabilities?

Debts which are owed by a business and a business expects to pay within the next 12 months.

Examples include:

• Short term borrowings (i.e. overdraft)

• Trade creditors (payables)

• Accruals

What are long term liabilities?

Debts owed by a business that is due to be paid in over a year’s time e.g. bank loans.

What is working capital?

This is the money needed in the business to pay for the day-to-day expenses of the business.

It is the difference between current assets and current liabilities.

What is capital employed?

Refers to the total amount of capital invested in a business for the purpose of generating profit.

Capital employed= Long term liabilities + Shareholder funds

*Shareholder funds = Share capital + Retained profits

What is return on capital employed (R.O.C.E)?

Return on capital employed (ROCE) tells us what returns (profits) the business has made on the resources available to it. ROCE is calculated using this formula:

Net profit / Shareholder funds + long term liabilities x 100

How do you analyse the return on capital employed of a business?

With ROCE, the higher the percentage figure, the better. In theory, if the ROCE is 5% above the rate of interest provided by banks on savings, then it could be argued that the return is good. However, the figure needs to be compared with the ROCE from previous years to see if there is a trend of ROCE rising or falling and/or it needs to be compared with industry averages. It could be argued that the ROCE should be compared with a number of years if a trend is to be spotted.

The ROCE is important to a business because if the rate of return is deemed to be good, then it can help to retain existing shareholders and attract new investment. This means that more capital will be available to the directors and management of a business to invest into strategies, such as physical growth, research and development into new products, marketing campaigns or human resources.