Analysis of Balance Sheet

Before finalizing a decision on which company to invest your hard-earned money in, it is recommended that you understand the balance sheet properly so as to analyze its important elements. It is through such analyzing that right investment decisions are made most of the time.

You must understand that just because some points are more than others, it does not mean that the rest of the points are useless. Rather, every point has its own significance that contributes to the overall result of the balance sheet. With this in mind, we can move on to the first step which is examining the trends alongside the current. These include the trends related to profit, overheads, assets, margins and so on.

Since the balance sheet lets us see a still image of the ever-changing finances of a particular company, we must always remember to take into consideration the market conditions of that period while analyzing the balance sheet. Previous balance sheets should also be brought forward for analyzing as a trend can be calculated whereupon current business decisions can be made.

Another thing that we should do is compare the particular company to other companies in the same industry. This way we can determine where our company stands in the market. Of course, there are some key points that you need to remember –

  • Whether the liabilities of the company can be paid off with liquid cash.
  • Whether the total amount of assets is greater than the total amount of debts.
  • Do the creditors owe enough money to be able to run the business smoothly?
  • Are sales coming in from the optimal use of the company’s assets?
  • How much profit is generated from these sales?
  • Out of the total equity of the business, exactly how much belongs to shareholders?
  • A fixed figure in terms of capital that will be enough to make sales and finance the business throughout the envisioned period.
  • How much improvements has the company made financially since it was first established?

Since most of these answers require a comparison to external data, you can see why it is important that additional information regarding the surrounding factors of the business needs to be gathered.

A quick glance at the balance sheet will show you things such as ratio of debt/equity, amount of cash and equivalents and the assets along with their depreciation rate. These are crucial in that they are directly affected by how much you are looking to invest. The low debt to equity ratio will appeal to a value investor who wants a low book value when compared to the price of shares, whereas the conclusion of maximum leverage with minimal cash may lure in a willing growth investor.

Not only that, but we should also look at other financial statements. The reason for this is that these statements will help us see where the capital of the company was spent, thereby helping us make adjustments in required areas to keep maximizing profit for the projected period of time. For instance, the Profit and Loss Statement shows us the sales and their cost, profits and expenses.

Some of the things reflected in the balance sheet are quick ratio, current ratio, ratio of debt to equity etc.
You must also know how liquid the assets are – the more positive the figure, the better the financial standing of the business. Finally, the executive team should be inspected closely as these are the ones that are piloting the business and their actions, no matter how small, can often have a huge impact in the earnings of the company,

What is a Balance Sheet

Whether you operate a small or large-scale business, you know how important it is to keep track of expenses. Maintaining an accurate record of your finances is crucial when it comes to running your business smoothly. One of the best ways to ensure proper maintenance of your finances through accounting is by utilizing a balance sheet. A balance sheet is a basic record of a company’s current financial standing and is comprised of assets, liabilities, and equity. It helps you and investors to see where your business stands financially by taking all of those elements into account. Here are a few basic facts about balance sheets and the role they play in your company’s finances.

Balance sheets are not merely just a record of expenses. They do give you a general scope of how and where your money has been dispersed, but that is not their primary purpose. Instead, they show your company’s credibility and its worth by breaking down your debt and assets so it can be appraised by the government or investors. They typically show your current financial standing at the end of a certain time period, or display your transaction data that occurred between two specific dates. Much of the information you have to provide during the process of applying for a car or home loan is the same information used to make a balance sheet.

Also known as a statement of financial position, it is comprised of three main financial components. The first component that is used on the sheet is a company’s assets. This includes anything that a company owns such as land, buildings, cash, or petty cash. Any of these things are considered to have future value so they are shown under the asset section and are listed under different classifications such as current assets, tangible assets, and investments. This gives a creditor or investor an idea of what your company’s current worth is.

The second component that is itemized on the balance sheet is the company’s liabilities. Some liabilities include accounts payable, interest payable, or income taxes payable. Basically, a liability is considered any amount a company owes to a creditor. It enables the investor to see the amount the company owes versus what they own in assets. The liabilities are also listed under different classifications on the balance sheet. They are either listed as current or long-term liabilities. Any amount owed within one year of the sheet date is considered current, and any amount that is payable for longer than a year is considered long-term.

Finally, the third category listed on the balance sheet is the company’s equity. The company’s equity is equal to their assets minus their liabilities (or their debt). The equity is called the “source” of the company’s assets, and is also known as the net worth. The net worth is the important part of the balance sheet that demonstrates the investment the owner has in the company. All of these components combined create a balance sheet which helps a banker, creditor, or investor determine any risks that may be associated with a company’s financial standing. The sheet typically lists the company’s name and address at the top of the page with the sheet date underneath which specifies the dates that the information covers. Balance sheets are both an important and helpful tool for any business and they contribute to the overall health of a company’s finances.

Sample Balance Sheet

At one point or another, you will need to know how to read a constructed balance sheet for your own business or for someone else’s. At first sight, the task may seem confusing and maybe even overwhelming, especially if you are not familiar with accounting. First it helps to know what the lump sum of information represents before you try to break it down and comprehend it.

In general, a balance sheet gives you an overall snapshot of a company’s worth by listing what the company owes versus what the company owns. This information is divided into categories and classifications to better organize the data. Once you have a grasp of what each category is comprised of, understanding what you are reading becomes easier. To help you with this, here is the basic information that is listed on a balance sheet and what it all means.

When you begin to read a balance sheet, you will see that the name of the company and the specific dates that the data covers will be listed at the center on the top of the page. The page is then split into two sides; the left side shows the assets and the right side shows the liabilities and equity. These are the three main categories of the balance sheet─ assets, liabilities, and equity. Assets are the amounts of anything the company owns, liabilities are the amounts of what the company owes, and equity is the company’s net worth or the total of assets minus liabilities.

Under the asset category, you will see the assets titled either current or long-term. Typically, the most current assets are listed first, before the longer-term assets. The same goes for the other side that lists the liabilities. The current, shorter-term debts will be listed first, followed by the longer-term debts. Within the asset category, you will see the items broken down into smaller classifications such as investments, property, plant, and equipment. Finally, you will see an area on the lower right-hand side of the page for shareholders’ equity. This area lists information such as stock, capital, and retained earnings. Overall it represents the amount of money that has been invested in the company.

After reading all of this information on the balance sheet, the next step is to see if the total assets are equal to the total liabilities plus the shareholders’ equity. This formula is what determines if the sheet is “balanced”. In general, the formula is: assets = liabilities + equity, or equity = assets – liability. To analyze all of this information combined, a financial ratio analysis is used. One kind of financial ratio analysis is the working capital ratio, which is the sum of the company’s current assets minus its current liabilities. The debt-to-equity ratio can also be used, which divides the company’s liabilities by its shareholders’ equity. This helps to examine how the company is financing its assets.

There are other financial ratio analyses available to use when reading a balance sheet, but the two aforementioned ratios are helpful and both very common. All of the amounts listed in these categories are what make up the basic content of a balance sheet. By understanding and utilizing this information, you will be able to see a company’s current financial position. This is helpful for any investor, creditor, banker, or for anyone who needs to make a balance sheet for their own business.

Balance Sheet Template

Normally, you may use an accountant to write a balance sheet for your business. You may have even seen an example of one by looking at another company’s, but have not written one yourself yet. If you would like to be able to construct one for your own business or at least understand how to write one so you can better comprehend its purpose, then you have to begin by learning what information typically makes up a balance sheet. Once you know what content is required, you have to learn how to write it in the proper format so it can be displayed accurately. To make sure a balance sheet reflects the correct information and is easy enough for any investor or creditor to read, here are the basic components that are required to fill it out along with the proper formatting for the content.

When you begin to write your balance sheet template, the title “balance sheet” or “statement of financial position” should be placed at the top of the page along with your company’s name and the dates that the sheet will be presenting. Next, there needs to be three main categories of information listed: assets, liabilities, and stockholders’ equity. One of the most common ways to format this information is by listing the assets on the left-hand side of the page, and the liabilities and stockholders’ equity on the right-hand side. This will organize the content and is the general account format for any balance sheet.

Underneath these three main categories, any account relevant to each category is listed in order, starting with the most current accounts. The account is then followed by the amount which should be rounded without showing cents. Under assets, there should be a classification titled “current assets” which will include cash, accounts receivable, and inventory. The other classifications under assets can include investments, tangible assets, and property and equipment. After filling in all of the asset information, list the total amount of assets directly underneath the column.

Similar to the format on the asset side of the page, a classification titled “current liabilities” should be listed under the liability category. The liabilities under this classification should include accounts payable, accrued expenses, and wages payable. Again, list the liabilities in order beginning with the most current debt. Underneath the current liabilities, a category titled “long-term liabilities” should be used to showcase any long-term debt. Finally, underneath liabilities, the stockholders’ equity category should be shown. This category is comprised of preferred stock, common stock, and retained earnings. Add up these amounts and place the total directly underneath the column just as you did with the assets and liabilities.

Keep in mind that all of the information listed in the different categories of a balance sheet can be tailored to your specific business. There are a number of other classifications that can be used to show amounts of various accounts. List whichever accounts apply to your business and leave out anything that your company does not have to account for. Your company’s asset, liability, and equity account information is what you will need to properly fill out a template. By formatting the information this way, you will have an appropriate balance sheet to present to any investor or creditor in no time.

Small Businesses Balance Sheets

A balance sheet is a very important business tool to record and present a company’s crucial financial information to a bank, creditor, or an investor. It demonstrates a company’s worth by listing assets, liabilities, and equity, which can then be analyzed to see the company’s current financial standing. Any size business needs to utilize balance sheets, but they are significantly more advantageous when used by small businesses because they help represent the company’s growth potential to investors. Small businesses can benefit greatly from using balance sheets, especially during a time when they need them the most─ when they are trying to expand.

Similarly to applying for any kind of personal loan, one of the first things a banker looks for when trying to determine whether to approve your company or not is your ability to pay off existing debt. When you are looking to take out a loan for your small business, the banker can see how much your company owes and how much your company owns by looking at a balance sheet. By appraising your company’s net worth, the banker will have a better idea of whether you should be approved or not. This is one example of how balance sheets help to indicate your company’s growth potential. By showcasing your previous responsibility to accumulated debts, you will have a better chance at being approved for a loan or gaining an investor’s confidence in you.

By documenting your company’s current and long-term debt, a balance sheet can show an investor those liabilities in comparison to your assets. The difference between your assets and liabilities is equal to your company’s equity, or net worth. The net worth shows investors a company’s strength and weakness and gives them a good idea of which kinds of investments are possible for its future. Is your business in a position to grow or does it need to make more money before it can expand? Are there significant risks associated with your spending and management of funds? These are a few basic questions that a balance sheet can help answer.

Aside from assessing your company’s strength and growth possibilities, balance sheets also help your small business to analyze any adjustments that may need to be made. Due to the content that is collected on a balance sheet, recognizing certain trends in your spending and investing is easier to identify. This helps to show you where changes need to be made in order to place your company in a better financial situation. These trends can reveal problem areas such as a company’s lack of payment on certain liabilities due to a shortage on cash or other assets. They can also contribute something positive by indicating your business’s productive progression of spending and resource management. Whether applying for another loan, looking to earn the confidence of an investor or creditor, or trying to gain a better insight into your own company’s current financial standing, a balance sheet can help in leaps and bounds. It is essential to the overall health and wellbeing of any small business, and offers an organized, effective way to document a company’s finances.

Balance Sheet Key Terms

Before reading or writing balance sheets for your company or for someone else’s company, you need to be familiar with what they are and the basic terminology that is used to comprise them. A basic balance sheet is a record of a company’s financial situation at a certain point in time. It is the collection of a company’s assets, liabilities, and stockholders’ equity arranged in a specific format to help show the business’s net worth and financial standing to a potential banker, investor, or creditor. The sheet is broken down into three main categories, and then the information is placed under a number of classifications to better organize the data.

The first category of items found on a balance sheet is titled “assets”. Asset is a term used to describe anything a company owns, or anything that has future value. These are things that have been acquired through previous transactions such as purchases and investments. The second category is liability. Liability is a term that represents any debt or amount owed by a business. The liability category is split up into two areas, current and long-term liability. Both “current” and “long-term” are terms that apply to both assets and liabilities on the balance sheet. A current liability for example, stands for a debt that is owed within one year of the balance sheet date. Conversely, a long-term liability stands for a debt that takes longer than the course of a year to be paid.

Some examples of terms you will typically see under “assets” on a balance sheet are investments, property and equipment, and intangible assets. Investments are the company’s funds for construction, stocks, or bonds. Property and equipment includes land, buildings, supplies, or any furniture that the business owns, and intangible assets are patents, trademarks, or copyrights. The term “total asset” is the lump sum of all of the aforementioned assets combined.

Now that you know what current and long-term means, it’s important to understand what items are considered current or long-term in the liability category. Current liabilities can include accounts payable, wages payable, interest payable, or taxes payable. Accounts payable are amounts a company owes for items purchased with credit, and wages payable are amounts the company owes to employees for hours worked. Interest payable is the amount of interest the company currently owes, while taxes payable are any current taxes the company owes.

Long-term liabilities can include bonds payable, which are amounts due for bonds that were issued by the company. They can also include notes payable, meaning amounts that are due by the company resulting from a written agreement to pay, such as a loan from a bank. The term “total liability” is similar to “total asset”. It represents the lump sum of all current and long-term liabilities listed on the sheet.
Finally, there is one other basic term found on the balance sheet. Stockholders’ equity, the category commonly found on the lower right-hand side of the sheet is the difference between the company’s assets and liabilities, or the sum of that difference. It is considered the “source” of a company’s assets. Some terms that will be found under this category include stocks and retained earnings. Stocks represent a company’s ownership within a corporation, and retained earnings are portions of net earnings that are retained by the company. Together, all of these basic terms create the layout of a balance sheet and contribute to the overall health of a business.