How do you construct and analyse your company's functional balance sheet?
What is the purpose of the functional balance sheet? How should it be drawn up and analysed to ensure that your company's accounting is sound?
All businesses are required to keep proper accounts, but not everyone is a chartered accountant. Do you know that you need to draw up a functional balance sheet, but don't understand how to go about it? You've heard of working capital and working capital requirements (WCR), but don't know how to calculate them? What about your cash flow?
This article, co-written with Raphael Berguig, a chartered accountant and statutory auditor at Nexco, guides you through the process of drawing up this accounting document. You will no longer have any doubts about the classification of shareholders' equity, fixed assets, trade payables and stocks. The distinction between uses (assets) and resources (liabilities) will become clear.
Functional balance sheet: definition
What is the functional balance sheet?
The functional balance sheet is an accounting document, and more specifically a form of balance sheet, which includes :
- uses, i.e. the use of the company's financial resources:
- stable assets, i.e. fixed assets: machinery, premises,
- current operating assets: stock of finished goods, raw materials,
- non-operating current assets: receivables,
- cash assets (or positive cash flow ): cash at bank and in hand,
- resources, i.e. the origin of financial resources:
- stable resources: shareholders' equity, depreciation, financial debts,
- operating liabilities: trade payables,
- non-operating debts: sundry debts,
- passive (or negative) cash flow.
What is the difference between the accounting balance sheet and the operating balance sheet?
These two balance sheets are distinct, but the operating balance sheet is based on data from the accounting balance sheet.
In the accounting balance sheet, a distinction is made between assets and liabilities; in the operating balance sheet, we talk about uses and resources.
Another difference is that the accounting balance sheet gives more detail, whereas the operating balance sheet does not. For example, the balance sheet shows only "tangible fixed assets", without going into detail.
A word from the expert
The accounting balance sheet gives an overview of the company's assets, while the functional balance sheet focuses on the management and use of financial resources. This distinction is essential for an in-depth financial analysis.
Why draw up a functional balance sheet?
- To carry out a financial analysis of the company, by studying its financial structure: where the money comes from and how it is used. It tells the story of the company's assets.
- Identify any imbalances and find solutions to restore the balance between uses and resources.
- Serves as a basis for calculating working capital, i.e. the balance between uses and resources, and helps to assess any working capital requirements (WCR).
Structure and presentation of the functional balance sheet
The functional balance sheet is presented in the form of a separate table:
Here is a simplified representation:
Structure and presentation of jobs
The order of each line is important: jobs are ordered from the least liquid, or available, to the most liquid.
To put it trivially, the further down you go in the list of uses, the quicker the money is available. For example, positive cash flow is available more quickly than fixed assets such as goodwill, for which you would have to wait to sell it to recover the money.
N.B. Fixed assets should be considered at their gross value in your functional balance sheet.
Structure and presentation of resources
The resources are ordered according to whether or not they are due and payable.
For example, equity capital is often the last item to be recovered, when a business ceases, for example. Conversely, tax and other debts are due very quickly.
How do you draw up a functional balance sheet?
Constructing the functional balance sheet from the accounting balance sheet
As we saw earlier, the functional balance sheet is based on the accounting balance sheet. To do this, there are several groupings and reclassifications:
- vertically between uses, on the left, and resources, on the right,
- horizontally according to the nature of the amounts (stable or current).
| In the balance sheet ➡️ | In the functional balance sheet ➡️ | Values concerned |
|---|---|---|
| Fixed assets | Stable assets |
|
| Current assets | Current assets |
|
| Shareholders' equity | Stable resources |
|
| Liabilities | Current liabilities |
|
| Cash and cash equivalents | Cash assets | Cash and cash equivalents |
| Bank overdrafts (short-term) | Passive cash |
|
This video explains the transition from the accounting balance sheet to the functional balance sheet in a simple and visual way:
Excel functional balance sheet: example to download
The theory is clear, but you don't want to build your functional balance sheet from an empty Excel table? appvizer has created a simple, ready-to-use Excel balance sheet template:
This functional balance sheet template is free: all you have to do to use it is download it!
Build a balance sheet simply with dedicated tools
😱 Are you worried about making mistakes by managing your functional balance sheet manually in a spreadsheet, or about wasting time instead of developing your business?
✅ Rest assured: it is possible to construct a functional balance sheet without (being) an accountant! Accounting software automates the management of your company's accounts, in particular the construction of the balance sheet and the functional balance sheet.
🛠️ Which software should you choose?
- If you're a self-employed business (or micro-business): Mister Compta,
- If you're a VSE or SME: Sage 50cloud Ciel,
- You're a start-up: Sinao,
- You are a healthcare professional: Self-med.
How is the functional balance sheet analysed?
Investment cycle, financing cycle, operating cycle and cash flow cycle
As we saw earlier, the functional balance sheet is a tool for analysing a company's financial structure. This analysis is based on several cycles:
- the sustainable cycle, or financing and investment cycle, which ensures that long-term investments are financed to the same level (a stable use must be equal to a stable resource),
- the operating cycle, which looks at the differences between operating financing requirements and the way they are financed (for example, inventories and receivables versus operating liabilities),
- the non-operating cycle, which looks at the difference between receivables and payables unrelated to the company's business,
- the cash cycle, which compares cash assets and cash liabilities.
A word from the expert
Understanding the investment, financing and operating cycles is essential for assessing a company's financial health. They shed light on the way it finances its investments and manages its day-to-day operations, aspects that are fundamental to financial strategy.
Calculate total net working capital (TNWC)
Why should you do this?
It shows the balance of resources available once fixed assets have been financed.
How is it calculated?
Working capital (WC) = stable assets - stable liabilities
Analysis: if working capital is negative, this means that the company is unable to finance its investments with stable resources. It is therefore necessary to consider a capital increase, or a bank loan, to make up for this shortfall and ensure the long-term viability of the company's finances.
A word from the expert
The NERF measures available stable resources after financing fixed assets. A positive NERF indicates good long-term financial health. A negative NERF, on the other hand, suggests a potential financial risk requiring corrective measures such as a capital increase or recourse to long-term debt.
Calculating working capital requirements (WCR)
Why should you do this?
The working capital requirement shows the need to finance jobs once current liabilities have been used up.
N.B. Operating WCR and non-operating WCR are calculated in the same way.
How are they calculated?
WCR = current assets - current liabilities
Analysis: if WCR is negative, this means that the company is taking in more cash than it has in receivables and inventories, which is quite positive for cash flow!
If the WCR is positive, this means that the company has little or no trade payables, but does have stock and trade receivables. In this case, it may be a good idea to review customer follow-up and sales management.
Calculate net cash flow
Why should you do this?
To measure the money remaining in the company's coffers after financing its activity.
How is it calculated?
Net cash = cash assets - cash liabilities
or
Net cash = FR - WCR
Analysis: a negative net cash position indicates that the financing of the business depends on short-term cash credit, such as bank overdrafts. Working capital is no longer sufficient to finance the business.
Take stock, calmly
Accounting is a must for all company directors, whether you manage your business alone or with the help of a chartered accountant. The functional balance sheet is one of the documents needed to measure the company's financial health and anticipate decision-making. Ultimately, it's a decision-making tool for steering your business!
What are your best practices for drawing up the functional balance sheet?
Article translated from French