Insight into your finances

Do you have sufficient insight into your finances?

Can you answer the following questions with 'Yes'? Then you have proper insight into your finances.

1. Can you properly estimate what your cash flows look like in the short and long term?
2. Do you take into account VAT, income tax, and wage tax which usually have to be paid later?
3. Do you have insight into the (financial) health of your company?
4. Can you explain your solvency, profitability, and liquidity?
5. Are you a good sparring partner for your financier when you have put in a financing request?
6. Can you determine the financial feasibility of your plans, with or without the help of a specialist?

The balance sheet, the profit and loss account, and the ratios with which financiers assess your figures form the basis for a financial plan. What do you have to pay attention to?

Balance sheet

The balance sheet is a statement of assets, liabilities, and equity at a particular point in time (usually 31 December). You include everything that is present in the company at that time, such as all debts, goods, and outstanding accounts. You record all this in a table. This is referred to as your balance sheet or income sheet.

Profit and loss account

The profit and loss account provides an overview of the income and expenses of your company in a year. This allows you to see whether your company is making a profit or a loss. Small businesses are not required to disclose profit and loss statements.

The income and expenses of a company are also known as liquid assets. Liquid assets consist of cash (coins and notes) and transferable money (in the bank) that a company has available. A cash flow statement shows how much money came in and went out of your business in a fiscal year.

Financial assessment and ratios

Before granting credit, financiers like to assess the financial situation of your company. They want to know whether your company can meet its payment obligations and whether it is interesting for them to invest in the company. Ratios are used to assess your company financially. The most commonly used ratios are liquidity, solvency, and profitability.

Liquidity

This is the extent to which your company can meet its payment obligations in the short term. The liquidity of a company consists of 3 key figures:

1. Current ratio. This key figure indicates whether (short-term) debts can be paid from the current assets. You calculate this as follows: Current assets / short-term debt = current ratio.

A positive value for this ratio is at least 1, an average company has a ratio between 1.2 and 1.5.

2. Quick ratio. This ratio also indicates whether (short-term) debts can be paid from the current assets. The difference with the current ratio is that any stock (your product supply) is not included in this calculation. You calculate this as follows: Current assets - stock / short-term loan capital = quick ratio

A positive value for this ratio is at least 1. In addition to the quick ratio, the stock term and debtor term are taken into account. With the stock term, you calculate the average lead time of the stock. The standard is a maximum of 30 – 90 days (industry dependent). You calculate this as follows: (stock x 365) / purchase = stock term.

In addition, you calculate the average lead time of the debtors. The standard is a maximum of 30 – 60 days. You can check this per debtor and calculate it as follows: (debtors x 365) / turnover = debtor term

3. Net working capital. The (net) working capital is the difference between the current assets and the short-term loans on the balance sheet of a company. You calculate this as follows: Current assets – short-term loans = net working capital.

The (net) working capital is positive when the current assets are greater than the short-term debt.

Solvency

Solvency is the ratio of your equity to the required capital. This indicates whether the company can pay its debts in the long term. You calculate your solvency as follows: (equity capital / total capital) x 100% = solvency.

The bank expects that you as a (starting) entrepreneur also contribute equity, usually at least 20%. In certain sectors, such as the catering industry, this can even rise to 50%.

Profitability

Profitability means how profitable your company is. You compare the operating result (profit) with the average total invested capital. This shows the extent to which you are and remain successful as an entrepreneur. You calculate this as follows: (corporate profit / average total invested capital) x 100% = profitability.