One of the coolest features of the Crunch online accounting software is the ability to generate real-time financial reports. With just the click of a button, your software can generate an Income Statement (formerly known as a Profit & Loss Account), Statement of Financial Position (formerly known as a Balance Sheet), and even Interim Accounts, using the data you have entered into your Crunch software.
These reports – though useful – are still based on statutory accounting reporting, so if you’re not financially-minded you may find them difficult to follow. We thought we’d take a moment to explain what’s actually reported on a Statement of Financial Position, and why you need one.
An example of a Statement of Financial Position
A Statement of Financial Position generated by the Crunch system
You can find the definitions for all the items on your Statement of Financial Position in our glossary of business terms, but we’ll run through the important bits.
Thinking like an accountant
You’ll notice your Statement of Financial Position is split into years, 2018 and 2019 – these aren’t regular calendar years, but company financial years (or ‘accounting periods’).
Every company has a Year End which is set when the company was incorporated, though this can be changed by the directors of the company. We’ve got a separate article explaining Limited company director’s responsibilities: What you need to file with HMRC & Companies House and when.
In the Statement of Financial Position example, shown above, the company financial year 2019 covers the accounting period 1st February 2018 to 31st January 2019.
The Statement of Financial Position reports the assets, liabilities and equity of your company as at a specific date, every 12 months. Importantly, the statement shows transactions as at the date they were incurred, not the date you entered them into your Crunch software.
For example, if your company paid for a hotel room for that conference you attended in January 2019, but you didn’t get round to recording it until March 2019, you must include the transaction in your 2019 Statement of Financial Position for the company accounting period ended 31st January 2019. This is known as an ‘accrued expense’.
Don’t let the layout put you off, either. The two-columns-per-year format makes understanding the Statement of Financial Position a little easier, and it shows how your company’s performance has changed compared to the prior year. Every time you see a horizontal line, it simply shows the sum of the figures above it. Remember, figures (in brackets) are losses or liabilities.
So what’s actually on a Statement of Financial Position?
Fixed Assets and Current Assets
The jargon may put you off, but this one is quite simple; an asset is something your business owns. A “Fixed Asset” is an asset with a useful life of more than 12 months (such as property, plant and equipment). There are also “Intangible Assets” which have no physical presence (like a trademark, goodwill, or customer loyalty) but may have a useful life of more than 12 months to the business.
“Current Assets” include cash, bank balances and assets you expect to convert into cash like stock and debtors.
Trade or Other Debtors
Debtors are people who owe you money. In the case of “Trade Debtors”, this will include any outstanding amounts your clients owe you. “Other Debtors” refers to money your company is owed that isn’t through sales. In the case of Crunch clients, this will usually be the Director’s Loan Account or refunds expected from HMRC.
This single entry is actually a combination of two different balances. The first, “cash in hand”, means physical cash your business has in its possession – notes and coins. The contents of your petty cash drawer, for example. The second, “cash at bank”, is (unsurprisingly) your bank balance. It includes your company’s current and savings accounts.
Creditors are people you owe money to, and the liabilities are split between ‘current’ and ‘long-term’. A current liability is one you expect to settle within 12 months (such as payments to suppliers and running costs). A long term liability is one you expect to settle in more than 12 months (such as a bank loan).
What does a Statement of Financial Position do?
At its most basic, a Statement of Financial Position shows the assets your company has and the liabilities it needs to settle with others. The statement shows the performance of your company over time – its capital and reserves accumulate to show the total amount available to distribute to shareholders as at a specific date.
If you want a snapshot of your company’s financial health, the Statement of Financial Position should be your first stop.
The importance of good bookkeeping
As you can see, there’s loads of useful information available from good online accounting software such as Crunch to help you run your business and plan for the future. However, the software is only as good as the data you put in. Whatever accounting software you use, you need to spend a little time each month on your bookkeeping to make sure things are up to date.
This means making sure you issue invoices (after all, you want to get paid) and record expenses (our Tripcatcher app for business mileage or our Snap app for recording and entering expenses from receipts make this simple). You’ll also need to reconcile your bank statements with your software so that everything is matched up. If you need to free up more time, you can get help with this bookkeeping from Crunch.
Keeping on top of all this means you have a clear picture of how your business is performing, your profitability and tax liability at any point. Not only does this mean you know how much you can pay as a dividend, it also means you’ve got a better picture of how your business is doing, so you can focus on growing your business.