What Is a Statement of Financial Position?
A statement of financial position shows the financial position of a business at a particular point in time.
→ It shows what the business owns, what it owes, and the amount invested in the business.
→ It is sometimes called a balance sheet.
→ Unlike a statement of profit or loss, which covers a period of time, a statement of financial position shows the position on a specific date.
Main Elements
The main elements are:
→ Non-current assets
→ Current assets
→ Non-current liabilities
→ Current liabilities
→ Capital employed
Non-Current Assets
Non-current assets are assets that a business intends to keep and use for more than one year.
Examples include:
→ property
→ land and buildings
→ machinery
→ vehicles
→ equipment
Example
A manufacturer owns:
→ Factory building = $500,000
→ Machinery = $300,000
→ Vehicles = $100,000
Total non-current assets = $900,000
→ These assets are used to help the business operate and generate revenue over several years.
Current Assets
Current assets are assets that are expected to be converted into cash, sold or used within a relatively short period, usually within one year.
Examples include:
→ inventory
→ trade receivables
→ cash
Inventory
Inventory is the stock of goods held by a business for sale or for use in production.
Example:
→ A clothing retailer’s inventory includes shirts, trousers and shoes that are available for sale.
Trade Receivables
Trade receivables are customers who owe money to the business because they have bought goods or services on credit.
Example:
→ A business sells $10,000 of goods to a customer on credit.
→ Until the customer pays, the $10,000 is a trade receivable.
Cash
→ Cash includes money available to the business, such as cash held and money in its bank account.
Non-Current Liabilities
Non-current liabilities are amounts that a business owes and expects to repay after more than one year.
Bank Loans
→ A long-term bank loan is a common non-current liability.
Example:
→ A business takes a five-year $200,000 bank loan.
→ The outstanding amount is a non-current liability, although the amount due within the next year may be classified separately as a current liability.
Current Liabilities
Current liabilities are amounts that a business expects to pay within a relatively short period, usually within one year.
Examples include:
→ trade payables
→ bank overdraft
→ short-term borrowing
→ other amounts due soon
Trade Payables
Trade payables are suppliers that the business owes money to because it has purchased goods or services on credit.
Example:
→ A retailer purchases $8,000 of inventory from a supplier and will pay in 30 days.
→ The $8,000 is a trade payable until it is paid.
Bank Overdraft
→ A bank overdraft may be treated as a current liability because the amount is generally repayable in the short term.
Capital Employed
Capital employed represents the long-term finance invested in a business.
A simple formula is:
Capital Employed = Total Assets − Current Liabilities
It can also be calculated as:
Capital Employed = Total Equity + Non-Current Liabilities
Example
→ Total assets = $800,000
→ Current liabilities = $150,000
Capital employed = $800,000 − $150,000
Capital employed = $650,000
→ This represents the long-term capital being used by the business.
Total Assets
Total assets are the combined value of non-current assets and current assets.
Formula:
Total Assets = Non-Current Assets + Current Assets
Example
→ Non-current assets = $600,000
→ Current assets = $200,000
Total assets = $800,000
Total Liabilities
Total liabilities are the total amount owed by the business.
Formula:
Total Liabilities = Non-Current Liabilities + Current Liabilities
Example
→ Non-current liabilities = $300,000
→ Current liabilities = $100,000
Total liabilities = $400,000
Working Capital
Working capital measures the amount available to a business to meet its short-term financial obligations.
Formula:
Working Capital = Current Assets − Current Liabilities
Example
→ Current assets = $250,000
→ Current liabilities = $150,000
Working capital = $250,000 − $150,000
Working capital = $100,000
→ Positive working capital means current assets are greater than current liabilities.
Simple Statement of Financial Position
| Statement of Financial Position | $ |
|---|---|
| Non-current assets | |
| Property | 500,000 |
| Machinery | 300,000 |
| Total non-current assets | 800,000 |
| Current assets | |
| Inventory | 100,000 |
| Trade receivables | 60,000 |
| Cash | 40,000 |
| Total current assets | 200,000 |
| Total assets | 1,000,000 |
| Current liabilities | |
| Trade payables | 80,000 |
| Overdraft | 20,000 |
| Total current liabilities | 100,000 |
| Non-current liabilities | |
| Bank loan | 300,000 |
| Total liabilities | 400,000 |
| Capital employed | 900,000 |
Calculations
Total current assets
→ $100,000 + $60,000 + $40,000 = $200,000
Total assets
→ $800,000 + $200,000 = $1,000,000
Total current liabilities
→ $80,000 + $20,000 = $100,000
Total liabilities
→ $100,000 + $300,000 = $400,000
Working capital
→ $200,000 − $100,000 = $100,000
Capital employed
→ $1,000,000 − $100,000 = $900,000
Interpreting a Statement of Financial Position
A statement of financial position can help managers assess:
→ the assets available to the business
→ the amount owed to others
→ the business’s short-term financial position
→ the amount of long-term finance being used
→ whether the business has enough working capital
Working Capital and Business Decisions
Positive Working Capital
→ Current assets are greater than current liabilities.
→ The business may have enough short-term assets to meet its short-term obligations.
→ However, very high working capital may mean that too much money is tied up in inventory or receivables.
Low or Negative Working Capital
→ Current liabilities are close to or greater than current assets.
→ The business may have difficulty paying its short-term debts.
→ It may need to improve cash flow, reduce inventory or obtain additional short-term finance.
Analysing Assets
→ A business with a large amount of non-current assets may have invested heavily in production capacity.
→ This may support future growth, but it also means a large amount of money is tied up in long-term assets.
Example
→ A manufacturer has recently purchased new machinery.
→ Non-current assets increase.
→ The investment may increase production capacity and efficiency, but the business may also have higher loan repayments if the machinery was financed through borrowing.
Analysing Liabilities
High Non-Current Liabilities
→ A high level of long-term borrowing may provide finance for expansion.
→ However, the business will have future interest and repayment obligations.
High Current Liabilities
→ A high level of current liabilities may create pressure on working capital.
→ The business needs enough current assets and cash inflows to meet these obligations.
Making Decisions Using Statements of Financial Position
Should the Business Borrow More?
→ Managers should consider existing liabilities before taking another loan.
→ A business already carrying significant debt may face higher interest and repayment costs.
→ However, additional borrowing could be appropriate if it finances an investment that is expected to generate sufficient future returns.
Should the Business Buy More Non-Current Assets?
→ If the business has limited non-current assets, investment in machinery or equipment may increase productive capacity.
→ However, the business must consider whether it can afford the investment without creating cash-flow problems.
Should the Business Reduce Inventory?
→ A business holding excessive inventory may have too much money tied up in stock.
→ Reducing unnecessary inventory could release cash.
→ However, reducing inventory too much could result in shortages and lost sales.
Should the Business Offer More Credit to Customers?
→ Increasing trade receivables may encourage more sales.
→ However, money owed by customers cannot be used immediately to pay the business’s bills.
→ The business should consider whether customers are likely to pay on time.
Should the Business Improve Working Capital?
→ If working capital is too low, the business may need to:
→ collect money from customers more quickly
→ reduce unnecessary inventory
→ negotiate longer payment periods with suppliers
→ obtain short-term finance
Key Calculations
Total Assets
→ Non-current assets + Current assets
Total Liabilities
→ Non-current liabilities + Current liabilities
Working Capital
→ Current assets − Current liabilities
Capital Employed
→ Total assets − Current liabilities
→ The statement of financial position therefore helps a business understand what it owns, what it owes and how much long-term finance is being used in the business.