The Balance Sheet

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The Balance Sheet
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Asset Structure
The firms asset structure depends on the nature
of the business, for example

• Service industries Often have a very low level
  of fixed assets. Example 1- organisations
  providing internet related services have very
  small fixed assets (the only major ones being
  computers and related equipment). Example
  2- retailers have large amounts of assets tied-up
  in working capital (especially stock) and
  debtors may figure strongly- why?
• Manufacturers Have larger fixed assets. Stocks
  (such as work in progress and raw materials) are
  also quite high.

• Other factors affecting asset structure
• Stage of development of Co e.g. Microsoft began
  in a garage.
• Trading conditions if D is low in ST stock will
  rise
• Production techniques e.g. lean production
  methods.
• External change e.g. if recession looms, firms
  will increase cash.

Financing Assets
To buy assets, firms must incur a liability
(WHY?) or use retained profit. The sources of
finance used depends on those available and how
risk adverse the owners are.
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Working Capital (or net current assets)
current assets current liabilities
If Current Assets are too high with regard too
Current Liabilities then either

1. Too much money is tied-up in stocks (opportunity
   cost)
2. Too much money is tied-up in debtors (cash-flow
   problems)
3. Too much money is tied-up in cash (opportunity
   cost)

If working capital is too low firms may face
liquidity problems, which could lead to
insolvericy. Too increase its Working capital
firms could.? (refer to syllabus)
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What is a strong balance sheet?
When assessing this it is worth considering

1. Working capital A firm needs enough of this to
   cover day-to-day running and not have cash-flow
   problems. Acid test is a good judge.
2. Reserves This is the net total of all retained
   profit from previous years. Rises or falls, and
   this can say a lot!
3. Borrowing see Gearing
4. Asset structure e.g. Fixed assets should be
   financed by long-term finance, otherwise payments
   will be due before you have received any return.
5. Trends is working capital / borrowing / reserves
   etc. rising or falling.

The value of a business (summarise p41, Horner)