Cash Flow Forecasting
buildings, plant and machinery. Intangible assets may comprise good-
will, patents and licences, rights, monopolies, contracts and databases.
■ Current assets can be readily converted into cash within a short period,
normally one year.
■ Stocks – reported profits are affected by the valuation a company places
on its stock, as high value produces high profits. Accountants therefore
insist that stocks are valued at the lower of cost or net realizable value.
■ Current liabilities are debts due for payment in less than one year.
These include bank overdrafts and payment to suppliers, and expiring
■ Long-term liabilities are debts that need not be repaid within one year.
These may include bank loans and mortgages.
■ Called up share capital represents the number of shares that have been
issued by a company. (If trading ceased, any money left over after settle-
ment of all of the company’s other liabilities would be distributed
amongst the shareholders pro rata according to the number of shares
that each of them holds.)
■ Share premium is the difference between the nominal (face) value of
a share and the amount at which it is offered for sale to shareholders.
Successful companies issue shares at a premium to their nominal value.
■ Revaluation reserve – assets valued, such as land, may actually be
worth more than their original cost. The difference between these two
figures is the revaluation reserve – it is not profit that the company
has actually realized in cash terms, and therefore is not distributable
■ Profit and loss account figure. This is the sum total of profits accumu-
lated by the business and retained for use in the growth and expan-
sion of the business.
■ Shareholders’ funds is the owner’s equity.
■ Notes – several of the figures given in the balance sheet will be
explained in more detail in the notes that appear towards the end of
Debtors (also known as accounts receivable) are a current asset, and rep-
resent amounts owed to the company. The balance sheet formats as
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Summary of financial statements
prescribed in the Companies Act 1985 require the company to split their
debtors figure into the following categories:
■ Trade debtors – debts owed to the company arising from sale of goods
to customers of the company on credit terms.
■ Amounts owed by group companies – these amounts will represent
inter-group trading activities, i.e. sums owed to the company by its
parent company (if it is not itself the parent company), fellow sub-
sidiaries or subsidiaries of its own.
■ Amounts owed by companies and other institutions in which the com-
pany has a participating interest – that is, debts owed to the company
by institution(s) in which the company has a holding of 20% or more of
that institution’s shares.
■ Other debtors – for example, debts due to the company from the sale
of fixed assets or investments.
■ Prepayments and accrued income – for example, rent and rates paid by
the company in advance.
Most companies will show a single figure for debtors in their balance
sheet, but then break down the various categories in the notes section of
Companies will have different debtor profiles. Supermarket chains will
have very little showing in their accounts in the way of debtors, as most of
their sales will be for cash; any debtors shown in their accounts are likely
to be non-trade or prepayments. Other companies may conduct most or
all of their trade on credit terms, and will have large debtor balances.
Some key questions to ask about debtors include:
■ Customer concentration – is there too much reliance on one cus-
tomer, or on one major industry? What would be the consequences to
the company if it was to lose a major client? Unfortunately, in some
instances the company will grant credit to a customer only to find that
payment is not forthcoming.
■ What is the age pattern of the debtors? Are some very old debts?
■ Is there adequate provision for bad and doubtful debts?
■ What is the company’s credit granting policy (see Tables 2.3 and 2.4)?
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