The current financial position of your company speaks volumes on how well your business performed. It also provides more information on your company’s ability to pay off debts and its potentials as a good investment. More than anything else, a balance sheet, together with the income statement and the cash flow statements, are the pillars of your financial statements.
These are but some of the reasons understanding the structure of a balance sheet is indispensable not only for business owners but also for investors and other stakeholders.
With this in the background, it is only apt that you know all that there is about your company’s balance sheet analysis. You can start by learning the ropes to reading a balance sheet:
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 easily converted into cash. 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 noncurrent assets.
As a business owner, you should also zero in on your noncurrent assets. Noncurrent assets, or assets that are not easily converted into cash, put significant value to 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 at a greater extent.
Don’t have time or technical expertise in crunching your numbers on your own? Seek help from the experts! Contact the D&V team for more assistance in finance and accounting outsourcing services.