Aquaculture Businesses by Engle Carole;

Author:Engle, Carole;
Language: eng
Format: epub
Publisher: 5m Publishing
Published: 2019-07-15T00:00:00+00:00

7.5 Financial position and the balance sheet

In addition to careful monitoring of cash flow, the business must keep track of its financial position. It is especially easy for a new startup business to get too far into debt, and incurring more debt than the business can handle can quickly lead to business failure. The best way to track the financial position of the business, the level of financial risk of the business, and to assess the overall financial condition of the business is through the balance sheet. The degree of financial risk of the business is a good metric to use to evaluate whether the business is too far in debt or whether it is in a position to assume additional debt without adding excessive risk.

Financial position is measured by comparing the value of the assets owned by the business with that of its liabilities, or debts, and to determine whether the business is solvent. A solvent business is one for which the sale of all business assets would be enough to pay off all liabilities. If the value of the assets is less than the total value of its liabilities, then the business is judged to be insolvent and exhibits a greater financial risk. It is important to understand that financial position is quite different from profitability (that is measured as the difference between total revenue received and total expenses) and also from cash flow. Financial position is measured by net worth (sometimes referred to as owner’s equity) and is calculated by constructing a balance sheet (sometimes referred to as a Statement of Finances). Table 7.2 illustrates 3 years of balance sheets for the hypothetical indoor shrimp farm example.

Table 7.2 Balance sheets for indoor shrimp production facility, in US$. The balance sheet needs to be reviewed only once a year in most cases, typically at the end of the fiscal year of the business. The balance sheet first itemizes all assets of the business into general categories of time periods, typically ‘current’ (assets expected to be sold to generate revenue within the next year), ‘medium-term’ (the value of assets expected to be used for more than 1 year but typically less than about 7 years), and ‘long-term’ (the value of assets expected to be used for more than 7 years). Current assets typically include payments for fish or shrimp delivered to a buyer but for which payment has not yet been received, cash available in a checking or savings account at the end of the year when the balance sheet is prepared, or market-sized fish or shrimp on the farm that are expected to be sold in the coming year. Medium-term assets are most often equipment that is used for more than 1 year but less than about 7 years. Long-term assets are mostly land, buildings, ponds, and other real-estate assets. It is helpful to fully itemize the various assets in a balance sheet. Some accountants prepare balance sheets with the values in each category summed to facilitate quick

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