Smart Skills: Mastering the Numbers

If inventory is purchased for £80 and then sold to a customer on credit for £100, the assets go up by £20 (as £80 inventory is replaced by £100 receivables) and the profit goes up by £20 as shown by the extracts from the Balance Sheet below:

When the customer pays, the assets just reconfigure with no impact on profit:

This represents the total value of long-term loans the business currently has.

Retained Profit

This is the cumulative figure, over the life of the business to date, of the profits that have been available, after all the costs have been met, to reinvest back within the business.

Valuation of Net Capital Employed

Share Capital

Share Capital is valued on the Balance Sheet at its Nominal Value – i.e. at the unit of value given on the share certificate.

Valuation of Net Assets Employed

Valuation of Fixed Assets

[For an in-depth explanation of the terminology and accounting treatment of Fixed Assets see Appendix 3.]

In the example on the next page, a business buys a piece of equipment for £50,000 intending to use it in the business for 5 years resulting in a depreciation charge of £10,000 p.a. to be made against profit. The valuation of the equipment on the Balance Sheet (where it is shown at NBV – see below) falls over time as a result of the depreciation charge as follows:

Valuation of Net Assets Employed

Valuation of Fixed Assets

[For an in-depth explanation of the terminology and accounting treatment of Fixed Assets see Appendix 3.]

In the example on the next page, a business buys a piece of equipment for £50,000 intending to use it in the business for 5 years resulting in a depreciation charge of £10,000 p.a. to be made against profit. The valuation of the equipment on the Balance Sheet (where it is shown at NBV – see below) falls over time as a result of the depreciation charge as follows:

Payables

This is the amount of money you owe other people that has to be paid in the short-term (i.e. within 12 months).

Receivables

This is the amount of money you are waiting to receive for goods or services that have been invoiced to your customers but for which you have not yet been paid.

All balance sheets (or Statements of Financial Position) are snapshots at a point in time showing where the money came from and where it is currently invested.

[A word of warning: The focus so far has been on making a profit – i.e. selling products for more than they cost. However, businesses do not go into receivership because they make a loss but because they run out of cash. As profit and cash flow are not the same thing (and can even move in opposite directions), mastering the profit numbers is not enoug