Working capital
A business is solvent if it can meet its short-term debts when they are due for payment. To do this it needs adequate working capital. There are three main reasons why a business needs adequate working capital. It must:
pay staff wages and salaries
settle debts and therefore avoid legal action by creditors
benefit from cash discounts offered in return for prompt payment
You can calculate a firm's working capital by using the following equation:
Working capital = current assets - current liabilities
Many groups of people are interested in the published accounts of a company. The information they provide may influence future decisions. For example, lenders will be looking at the solvency of a business. Rivals are interested in monitoring the profits earned by competitors.
start up a business, eg pay for premises, new equipment and advertising
run the business, eg having enough cash to pay staff wages and suppliers on time
expand the business, eg having funds to pay for a new branch in a different city or country
Trading, profit and loss account
A trading, profit and loss account shows the business's financial performance over a given time period, eg one year.
Sales revenue
£80,000
Less costs of sales
£50,000
Gross profit
£30,000
Less other expenses
£20,000
Net profit
£10,000
The trading account shows the business has made a gross profit of £30,000 before taking into account other expenses such as overheads.
The profit and loss account shows a net profit of £10,000 has been made.
Balance sheet
A balance sheet shows the value of a business on a particular date. A balance sheet shows what the business owns and owes (its assets and its liabilities).
Fixed assets show the current value of major purchases that help in the running of the business, like delivery vans or PCs. In this case £150,000 of fixed assets are owned. Current assets show the cash or near-cash available to the firm. This includes...