Financial Statements: keys to avoid incurring in equity imbalance causes

In the business world, financial statements are an essential tool for strategic decision-making. These documents not only reflect the economic health of a company, but also make it possible to identify possible causes of financial imbalance. A financial imbalance can lead to critical situations, including insolvency. Therefore, understanding and properly handling financial statements is vital for any entrepreneur or manager/advisor. In this post, we will break down the keys to avoid incurring in causes of asset imbalance through an effective management of financial statements.

What are the Financial Statements according to the General Accounting Plan?

In Spain, the General Accounting Plan (PGC) establishes the rules and guidelines for the preparation of financial statements. The financial statements according to the PGC are:

• Balance Sheet: Presents the financial situation of the company at a specific time, showing its assets, liabilities and net worth.
• Profit and Loss Statement: Shows the financial performance during a period, detailing income and expenses to determine the result for the year (profit or loss).
• Statement of Changes in Stockholders’ Equity: Reflects the changes in the company’s equity over time, including income and expenses recognized directly in equity.
• Statement of Cash Flows: Analyzes cash movements, classifying them into operating, investing and financing activities.
• Notes to the Financial Statements: Provides complementary and clarifying information on the financial statements, detailing the accounting policies used and offering a more in-depth analysis of the figures presented.

Keys to avoid equity imbalance

The following are some crucial strategies to avoid equity imbalance through proper management of financial statements:

Constant monitoring and detailed analysis

It is essential to constantly monitor financial statements. Detailed analysis can identify trends and anomalies that could signal potential problems. Using accounting software tools can facilitate this process and provide more accurate and up-to-date reports.

Cost control and resource optimization

Rigorous cost control is essential. Identifying areas where costs can be reduced without affecting the quality of the product or service is a key practice. In addition, optimizing the use of resources improves operating efficiency and reduces waste, which is reflected positively in the financial statements.

Effective cash flow management

Cash flow is a critical indicator of financial health. Maintaining a balance between income and expenses, ensuring that there is always sufficient liquidity to cover obligations, is vital to avoid liquidity problems that can trigger an equity imbalance.

Financial planning and forecasting

Sound financial planning, based on realistic projections and scenario analysis, helps to anticipate potential problems and take preventive measures. Establishing and adhering to budgets is a best practice.

Risk and contingency assessment

Identifying and assessing potential financial risks is crucial. Implementing contingency plans to face adverse situations helps to mitigate the impact of unforeseen events and maintain financial stability.

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The patrimonial imbalance as a cause of dissolution

Article 363 of the Capital Companies Law (LSC) lists the causes for dissolution of capital companies. In particular, section e) establishes a specific cause for dissolution related to the net worth of the company. A detailed analysis of this section is presented below.

Article 363. Causes for dissolution.

The capital company must be dissolved:

“e) As a consequence of losses that reduce the net worth to an amount less than half of the capital stock, unless the latter is increased or reduced to a sufficient extent, and provided that it is not appropriate to request a declaration of bankruptcy.”

Paragraph e) establishes that a capital company must be dissolved when accumulated losses leave the net worth below half of the capital stock. This means that if a company experiences such significant losses that its net worth is reduced to less than 50% of its capital stock, it is in a situation of mandatory dissolution.

Shareholders’ equity and capital stock:

Equity: The difference between the company’s assets and liabilities. It represents the equity and permanent resources of the company.

Capital stock: The total value of the contributions of the partners or shareholders to the capital of the company, which serves as collateral against third parties.

Options to avoid dissolution:

The article also offers alternatives to avoid dissolution:

• Increase in capital stock: The company may choose to increase its capital stock, which could attract new funds and improve its net worth.
• Reduction of capital stock: It is also possible to reduce capital stock to balance the relationship between net worth and capital stock.

Declaration of bankruptcy:

Dissolution will not be appropriate if it is more appropriate to file for insolvency proceedings. This would apply in situations where the company faces insolvency and is unable to meet its obligations. An insolvency filing can provide a framework for debt restructuring and business continuity under judicial supervision.

Importance of financial monitoring:

To avoid reaching this critical situation, it is essential that companies continuously monitor their financial situation. Managers must keep a close eye on financial indicators and take timely corrective measures, such as recapitalization or cost reduction.

Conclusion

Article 363.e) of the Spanish Capital Companies Law is a crucial provision for the financial management and stability of capital companies. It establishes the obligation to dissolve the company when losses reduce the net worth to less than half of the share capital, but also offers alternatives to avoid dissolution. This legal framework underlines the importance of prudent and proactive financial management to maintain the solvency and stability of the company.

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