When looking at a company’s balance sheet, one of the most important line items to look at is creditors’ amounts falling due within one year. This figure tells you how much money the company owes to its creditors and which is supposed to be paid within the next 12 months. It’s important to understand what this number means and what factors could affect it because it is a good indicator of a business’s financial health.
In this article, we will explain the term in-depth so you know exactly what it means and why it is important. We will also discuss how these amounts are broken down into different categories, what factors could affect the size of the liability, and how creditors appear on a balance sheet.
What does “Creditors’ Amounts Falling Due Within One Year” Mean?
Looking at a company’s balance sheet, you will see many different line items. One of these line items is called “creditors’ amounts falling due within one year.” This figure tells you how much money the company owes to its creditors which is due to be paid within the next 12 months. The amount includes things like short-term loans, accounts payable, and dividends that are payable.
This number is important because it can give you a good idea about the financial situation the company is in. If the number is high, it means that the company has a lot of debt that is due within the next year. This could be a cause for concern because it may mean that the company is having difficulty paying its debts. On the other hand, if the number is low, it might mean that the company is in a good financial position but this will depend on other factors as well.
How are Creditors’ Amounts Broken Down?
The total amount that a company owes within the year can be broken down into different categories. The most common categories are:
- Corporation tax – This is the tax that a company owes to the government.
- Other taxes and social security costs – This includes things like VAT, PAYE, and National Insurance.
- Other creditors – This can include suppliers, landlords, and utility companies.
These debts may have different due times but as they all need paying within the next 12 months, they are all included in the “creditors’ amounts falling due within one year” figure. This is so it is easy to see how much a company owes in total and to compare it to other companies.
How the Total Owed to Creditors is Calculated
To give an example of how this total is calculated, let’s say that a company owes the following:
- Corporation tax of £15,000
- Other taxes and social security costs of £12,000
- Accounts payable of £20,000
The total amount that the company owes within one year is £47,000. This would be the figure that you would see on the balance sheet next to the listing for “creditors’ amounts falling due within one year.”
What Factors Could Affect the Size of the Liability?
There are a few different factors that could affect the size of this liability. The most common ones are:
- Interest rates – If interest rates go up, it will cost the company more money to pay off its debt which could make the liability larger. On the other hand, if interest rates go down, it will cost the company less money and the liability could get smaller.
- Contractual obligations – If a company has agreed to pay certain amounts of money at specific times, this could affect the size of the liability. For example, if a company has to pay £100,000 in six months and £200,000 in one year, then the “creditors’ amounts falling due within one year” figure would be £300,000.
- Operational factors – Things like the company’s sales, expenses, and cash flow can all affect how much money it owes to creditors. If the company is doing well, it might have more money to pay its debts. However, if the company is not doing so well, it might have to delay payments or even default on its debts.
How Do Creditors Appear on a Balance Sheet?
On a balance sheet, creditors will usually appear under the “liabilities” section. This is because they are money that the company owes. However, there are different types of creditors and they can appear in different places on the balance sheet. For example, secured creditors will usually appear under “long-term liabilities” because their debt is not due within the next year.
On the other hand, unsecured creditors will usually appear under “short-term/current liabilities” because their debt is due within the next year. It is important to understand the distinction because only short-term liabilities will be factored in when calculating the “creditors’ amounts falling due within one year” figure.
Situations Where the Money Won’t be Paid in One Year
There are some situations where the money owed might not be paid within one year even though it is classed as a current liability. This could happen if:
- The company has a loan agreement which states that the debt can be refinanced
- The company is in a long-term agreement with a supplier or landlord and they have agreed to defer payment for a period of time
- The company has made an early payment on a long-term contract
- The company is going through financial difficulties and has arranged for the debt to be paid over a longer period of time
None of these will be clear on the balance sheet so if you are dealing with a business that is claiming these situations, make sure you see evidence of this before you agree to anything.
Who May Want to See Your Balance Sheet?
There are a few different groups of people who might want to see your balance sheet. These include:
- Your bank – If you are applying for a loan, your bank will want to see your balance sheet to assess your financial situation.
- Your suppliers – If you are having difficulty paying your bills, your suppliers might ask to see your balance sheet to see if you are actually able to pay them and are just delaying payment.
- Your shareholders – If you are a public company, your shareholders will have the right to see your balance sheet. They will want to see how the company is performing.
- Potential investors – If you are looking for investment, potential investors will want to see your balance sheet to assess the risk of investing in your company.
- The government – The government may want to see your balance sheet if you are claiming any tax reliefs or benefits and to make sure you are paying the correct amount of tax.
Presenting Your Balance Sheet for Refinancing
If you are a business owner, there may come a time when you need to refinance your debts. This means taking out a new loan to pay off your existing debts. There are many reasons why you might need to do this, but it usually comes down to getting a better interest rate or extending the repayment period.
When you refinance, you will usually have to provide your balance sheet as part of the application process. This is so the new lender can assess your financial situation and see if you are a good candidate for refinancing.
When preparing your balance sheet, make sure you include all of your creditors, both secured and unsecured. This will give the lender a full picture of your financial situation and help them make a decision on whether or not to lend to you.
Attempting to conceal information or mislead a potential lender in any way is likely to result in your application being rejected and could even result in criminal charges.
Other Important Balance Sheet Terms
Now that you understand what creditors’ amounts falling due within one year is, here is a comprehensive list of other balance sheet terms that you might come across:
- Assets – This is anything that the company owns which has a monetary value. This could include things like cash, property or stock.
- Liabilities – This is anything that the company owes money on. This could include things like loans, credit cards or suppliers.
- Equity – This is the difference between the assets and the liabilities. If the assets are worth more than the liabilities, the company has positive equity. If the liabilities are worth more than the assets, the company has negative equity.
- Revenue – This is the money that comes into the company from sales or other sources. It is also called turnover.
- Expenses – This is the money that goes out of the company on things like salaries, rent or suppliers.
- Profit – This is the difference between the revenue and the expenses. If the revenue is more than the expenses, the company has a positive profit. If the expenses are more than the revenue, the company has a negative profit.
- Stock – This is the inventory that a company has. These could be things like raw materials, finished products or spare parts.
- Capital and reserves – This is the money that a company has set aside for things like investment or to pay off debts.
- Called up share capital – This is the money that has been invested in the company by shareholders.
- Accumulated losses – This is the total of all the losses that a company has made over time.
- Profit and loss account – This is a summary of the revenue, expenses and profit for a specific period of time.
If there are any terms you don’t understand then it is always advisable to speak to an accountant. They will be able to explain them in more detail and help you to prepare your balance sheet correctly and ensure that all the information is included.
You do not need to hire a full-time accountant if you are just running a small business but it is always worth consulting with one at tax time or when your balance sheet is required. The initial outlay will be comfortably offset by the benefits they can provide to your business and the time they will save you trying to navigate complex finances yourself.
Balance Sheet Tips
Now that you understand what a balance sheet is and how it works, here are a few tips to help you prepare one for your business:
- Keep it up to date – Your balance sheet should be prepared at least once a year, preferably more often if your business is growing quickly. This will ensure that it is accurate and up to date.
- Include all assets and liabilities – As mentioned before, make sure you include everything in your balance sheet. This includes things like loans, overdrafts, stock and even intangible assets such as goodwill.
- Make sure all the information is accurate – This is very important. If there are any errors in your balance sheet, it could lead to problems further down the line.
- Get professional help – If you are unsure about anything then it is always best to speak to an accountant. They will be able to help you prepare your balance sheet correctly and ensure that all the information is included.
By following these tips, you can be sure that your balance sheet is accurate and up to date. This will give you the best chance of success when applying for refinancing or other financial products. An accurate balance sheet can make all the difference when it comes to getting the money you need to grow your business.
A creditor’s amount falling due within one year is an important figure that appears on every business’ balance sheet which shows the amount of money the company owes to creditors. This figure is easy to calculate by taking the total of all the company’s current liabilities.
While this figure is important, it is not the only thing that lenders will look at when considering a loan or other financial product. They will also look at factors such as the company’s revenue, expenses, profit and loss account and equity.
If there is anything you don’t understand about your company’s balance sheet or your finances in general, it is always best to speak to an accountant. They will be able to explain everything in more detail and help you make the best financial decisions for your business.