How to read your annual accounts : The right questions

Active?

• The acquired assets to be sustainably used (constructions, materials, business assets, licenses, softwares…).
  It has to be noted that the assets used for lease are not included in this post because they are “rented” and not bought by by the company

• The jobs related to the operating cycle of the company, like the stocks, the debts, the treasury.

Passive ?

• The own funds which correspond to the funds that the manager (or his/her partners) leave for the company, that is to say, the company’s capital or the contributions of the operator
   
• The financial liabilities which are the amounts due to credit agencies which participate to the financing of the company's assets

• The operating losses, that is to say regarding the providers but also the state, the staff and the social organizations.

What is the criteria to check the state of the account ?
 

The company must always make sure that the resources are used in the best possible way respecting that :

• assets possessed in sustainable and secure manner (ex : fixed assets) are financed by stable resources (ex : loans)
   
• assets related to the exploitation cycle (ex : stock) are financed by resources from the same exploitation cycle (ex : supplier credit)

  Stable resources exceed stable assets.

The working tool is correctly financed. The situation is rather healthy and comfortable
 

 Stable resources are inferior to stable assets to be financed.

The financing of the working tool has not been correctly understood regarding the amount or the duration.

This anomaly leaves a fragility on the company which will have to be corrected
 

  The resources resulting from the exploitation are superior to the jobs.

The company has a financing exploitation surplus. This is the case in a hairdressing salon where the services are cashed immediately while the salaries and the social security contributions are paid in the end of the month.
 

  The jobs related to the exploitation cycle exceed the resources.

There is a need in financing called working capital needs.
This can come from abnormally high stock compared to the amount provided which would increase the risk to the stock (robberies, damage, …)

The use of this presentation decomposes the different steps of the training highlighting :

(a) Profit margin
It corresponds to the difference between the sales price of the sold goods (shampoos, care products, hairdressing accessories, …) and their purchasing costs.

(b) Production for the accounting year
In the case of a hairdressing salon, it corresponds to the turnover of the sold services.

(c) Added value,
It is obtained by deducting from both previous components, all the goods and the services charged by external actors (rents, insurances, fee, advertisement, …).

(d) Gross operating surplus
It is calculated from deducting added value the salary of the internal actors (employees, manager, social security contributions)
It is a real wealth created by the company.

(e) Net result
It is determined after the impact of all the other products and charges, especially payment installments, provision and corporation tax

If all the operations translated in the profit and loss account of the company were  conducted in “cash”, the net result would have an direct and immediate impact in treasury but the reality is very different…
 

First, some translated operations in the profit and loss account don't have any impact in terms of cash flow.
 

That way, the payment installments which correspond to the accounting of the usury of some assets of the company doesn’t result in a withdrawal.
 

In the other hand, some events having an impact on the profit and loss account don't always have an immediate impact in treasury.

If a salon doesn’t cash the services, it will have a sheet profit but no treasury since the money will sleep in its clients’!

So, don’t hesitate to ask your accountant to determine your “disposable income”which must adhere to your retirement needs (taking into account all future financial commitments).

This calculation will enable you to better appreciate the level of personal direct debit that you can have every month without endangering your structure in the end of the year.