Is Your Business Overweight? How to Determine the Financial Health of Your Business

It’s common for small business owners to measure their financial health based on their income statement or bank account balance and deem their business “fit” if the bottom line looks good. To reveal why this approach can be deceptive, let’s apply a dieting metaphor.

Only looking at the bottom line is the equivalent of “sucking it in” when you look in the mirror. Sure, it looks like you’ve lost some weight, but what happens when you exhale? You might appear skinny for a moment, but that version of the situation isn’t accurate.

In terms of your business’ health, the balance sheet is the “real” you. Think of the income statement (also called the profit and loss statement) as your diet log. It tells you how well you did in a specific time period—last week, last month, or last quarter. We all know that there are good weeks and bad weeks on a diet. If you only look at one week or month, are you getting a true picture of your overall health? Of course not.

The balance sheet, on the other hand, is based on everything you’ve ever done. In our diet metaphor, it accounts for how much you’ve exercised and what you’ve eaten over your entire lifetime. The sum of all that information is what you see when you stop sucking it in.

To understand this metaphor, you need to understand what the balance sheet is and how it relates to the income statement. Your income statement contains information about what has occurred in the current period. Revenue, cost of goods sold and expenses are some of the account types found on the income statement.

To get an accurate picture of what’s happening in your business, you must adhere to the matching principle. That means you record expenses and cost of goods sold when you have earned the revenue that they are related to (if an expense is not related to revenue, you record it during the period it is used). The balance sheet accounts hold these revenue and expense items until the period in which they are earned or used. We use accounts such as prepaid insurance, customer deposits, and accrued payroll to classify these things on the balance sheet.

Income statement accounts only reflect transactions in the current accounting period. At the end of the period, the net profit or loss is moved to the equity section of your balance sheet (to retained earnings). This means that the balance sheet reflects all prior period revenue, cost of goods sold, and expenses in the form of retained earnings. The equity section also shows how much you’ve invested in and drawn out of your business. The equity section, therefore, shows what the company is worth to you.

So, how do you know if your business is “over weight”? Take a look at your debt to equity ratio (total liabilities divided by total equity). Compare that to your industry average and you’ll have a pretty good indicator of your business’ weight. Too much debt and not enough equity means your business is, in fact, overweight—even if your current period income statement looks healthy and you have money in the bank. Because everything shows up on the balance sheet, you can rely on it to depict the financial health of your business.

Copyright (c) 2010 Kelly Totten

Equity Release on Divorce – ‘A House is Not a Home?’

An increasing phenomenon in later life is the number of couples who are now deciding to divorce.

Often having lived together but had separate lives for many years, retirement then can seem the final straw in their relationship. Perhaps the knowledge of the impending hours of greater social time together once retirement arises is the most common reason!

Nevertheless, statistics show increasing numbers are deciding to end their marriages in retirement and move on, once their children have left home.

This works well for many people, but one of the major problems of divorce in retirement is dividing assets when you are approaching or have reached the end of your earning power.

Someone who was set for a comfortable retirement as part of a couple may well be struggling as a single person on half the assets. The marital home is often a bone of contention because it is usually the most valuable asset and often represents stability and security to the occupants.

However, pensions can also create many issues & this will be discussed in a separate article including pension sharing on divorce with offsetting & earmarking being the methods of distribution.

With reference to the marital home, equity release can often help in these situations.

The person who remains in the marital home can release cash from the value of the property either by a lifetime mortgage or a home reversion plan to ensure that the spouse receives their share of the property.

In most cases, it would not be possible for the person living in the marital home to take out a conventional mortgage because they may not have enough income to support it. However, by taking out a lifetime mortgage or a home reversion plan, they know they can stay in their home for life without having to make repayments during their lifetime.

‘A house is not a home’ may be easy to understand in normal circumstances but in the context of divorce, particularly from a woman’s point of view, a home is where you nurture and provide for those you love and care for and where you feel secure. Divorce is a traumatic time when normal life is disrupted. If it’s possible to maintain some security by doing a lifetime mortgage or home reversion plan to keep your home, many would take that option.

So How Can Equity Release Assist?

Well depending on the percentage split to each party, whether it is 50/50 or similar proportion, equity release could contribute either partial or in full towards the settlement.

However this would be dependent on age.

The size of the equity release would be determined by the age & in some circumstances the health of the remaining party.

For example at age 60 the maximum release could only be provided by a roll-up lifetime mortgage & the percentage currently is only 26%.

Nevertheless at age 65 a lifetime mortgage can release 31%, however a reversion scheme can also now be considered.

As age increases, so do the percentages, to the extent that at age 80 one can release a maximum of 46% on a lifetime mortgage & 56% on a reversion scheme.

In circumstances of ill health, some lenders will even increase the home reversions 56% giving a more favourable lump sum based on an impaired life facility.

Therefore, via a combination of negotiation of existing assets & the application of equity release could result in the remaining party not having to move or downsize at a distressing time. This enables stability throughout the remainder of their retirement..or until a new partner is found!

Mark Greggs is the founder of Equity Release Supermarket who were recently accredited ‘Best Financial Advisers’ at the Equity Release Awards 2008.