Capital and Reserves
Of all the forecasts that Figurewizad produces the balance sheet describing the forecast financial position of your business is the most important.
Capital and reserves describe a company's equity which will always balance against total net assets. If equity goes into deficit there can be no question that a company is insolvent. In practice though insolvency rarely waits on negative equity.
Working Capital and Cash Flow Insolvency
Cash and cash convertibles such as accounts receivable and stock for resale realisable within twelve months (current assets) less all liabilities payable within twelve months (current liabilities) describes net current assets. A bank overdraft, which is repayable on demand is itself a current liability and therefore always a charge to net current assets.
This is the working capital of the business which broadly describes liquidity without which cash flow to be generated by a company through core trading activity is impossible.
In the short term only, long term debt or increased paid up share capital will temporarily eliminate a working capital deficit. To effectively solve the problem for the longer term though cutting back on expenditure on overheads is the usual remedy.
Run Out of Cash and Go Out of Business
A positive balance sheet is no defence against cash flow insolvency therefore. If the working capital of a company is in deficit the time must come when it is unable to generate sufficient cash to pay its bills on time. That's when the process of insolvecy starts to kick in.
Planning Liquidity and Solvency
Successfully keeping a business's cash flow postive depends on forecasting to plan and budget for the year or years ahead. This is what Figurewizard does but however you go about it; do it you must.
The links below will take you to interactive working examples of the key liquidity and cash flow forecasts we produce simply using your estimated figures for sales, margins, overheads and investment - Essential for planning solvency as well as for ensuring profitability.
Could a balance sheet show positive net current assets (liquidity) but negative balance sheet equity and if so how could that be possible?
Yes. By introducing a loan as a long term liability into the balance sheet. The example below shows the effect of introducing a loan of 50,000 into a balance sheet with negative net current assets (i.e. liquidity) of -25,000.
This is only a temporary fix though. If the loan were scheduled to run for 24 months, the following year it would be payable within 12 months; ceasing to be a "long term loan" and becoming a current liability instead.
That would mean net current assets and therefore liquidity returning to negative territory at -25,000 as before.