Posted by Cedric Joshua Martinez
Mar 23, 2016
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The current financial position of your company speaks volumes regarding how well your business is performing in the market. It also provides more information on your company’s ability to pay off possible debts and its potential to gain traction as a worthwhile investment for individuals looking to invest.
By taking into account your company’s total assets, you’ll be able to define your financial position and know your next move as a business owner. You can start by learning the ropes to reading a balance sheet, knowing and analyzing your assets and assessing assets that have yet to come.
The first step to knowing the totality of your assets is through your financial statements. More than anything else, a balance sheet, together with the income statement and the cash flow statements, are the pillars of your financial statements.
How to use your company assets
Be familiar with the balance sheet equation
The balance sheet equation is Assets = Liabilities + Shareholders’ Equity. This equation is set in stone, so make sure you don’t forget it.
In its simplest term, this equation explains that assets are balanced by your company’s liabilities and the equity investments brought into the company by the shareholders. Therefore, your company’s assets should be the sum of your liabilities and shareholders’ equity. Results that yield otherwise might mean there are discrepancies in your financial statements.
Dig deeper into current assets
Current assets are short-term assets that can be used up or converted to cash within one year or one operating cycle. Because of this quality, current assets have a strong potential when it comes to financial liquidity. Being more familiar with current assets is highly recommended to make better use of them and to determine how to position them in your accounting balance sheet.
Consider non-current assets
As a business owner, you should also zero in on your non-current assets. Non-current assets, or assets that are not easily converted into cash, put significant value on your business. This could be anything that depreciates over time: a property, equipment, or a used car. These values are essential in calculating depreciation, which is why it comprises a large part of your overall assets.
Ponder on liabilities
Liabilities are debts that your company needs to settle within a certain period. These serious financial obligations are part of the balance sheet equation as well, since it will typically involve the use of current assets. Accounts payable and accrued expenses are under this category, which are money loaned from a third party, such as a supplier. Liabilities should be mapped out well according to their due date to ensure that they are paid on time.
Review shareholders’ equity
The cash that was put into the business by owners and investors is known as shareholders’ equity. Shareholders’ equity or the net worth of the business is calculated as the total assets minus the total liabilities of a company. When the financial year ends and the investors decide to reinvest, they will pay close attention to your balance sheet therefore it’s best to ensure that it is regularly reviewed to check the overall value of the business.
Use ratios for assessment
Finally, making good use of financial ratios will also help you understand your balance sheet more thoroughly. This is primarily due to the fact that such ratios help provide more insight into the financial health of your company as well as the overall state of its business operations. Keep in mind, though, that some financial ratios have requirements that go beyond the numbers in your financial statements.
Digging a toe into financial statement analysis and consolidation means thoroughly understanding all of its cornerstones - balance sheets included. Familiarize yourself with these concepts and you’ll surely be able to appreciate your critical business numbers to a greater extent.
Read Next: 4 Tips to Protect your Company's Assets
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This post was first published on 23 Mar 2016 and edited 28 April 2023. Edited by: Aly Tagamolila
