A balance sheet is a financial statement consisting of liabilities, assets and equity for a specific reporting period.
A balance sheet displays the equity or the volume of shareholder investments. The balance sheet of the company should include assets (its owns) and liabilities (its owes) to be an effective predictive tool.
This document shows liabilities, assets, and company's capital structure in total, it allows assess financial condition of the company quickly and can help to inform investors or creditors about it.
That is to say, a balance sheet is what a company owns in a certain period of time. Any kind of financial analysis can be made on the base of the balance sheet used in conjunction with other important financial documents.
What the Balance Sheet show
Any business has to deal with the three principal financial reports, which are the balance sheet (represents value), income (represents profitability) and cash flow. The intent of a balance sheet is to show the company capital structure at certain point in time and to give stakeholders a financial position overview of the company. The balance sheet helps verify the accuracy of the other two reports, and it is the most reliable and clear way of understanding financial situation for the business owner. Figuratively, the balance sheet is a snapshot of the business at the end of the year, quarter or month. Balance sheet is relevant just for a given date. All the financial indicators are shown on the one page, and there is an understanding of how things are going as of the date of publication. Perhaps, this report gives the most basic thing of understanding. It is profitability of the business. The balance sheet performs what return on equity is, it might be easier to deposit the money or convert it into currency, buy stocks, debentures and other assets, or just buy immovable properties and rent them out.
Important note: when it's a profitability question, it is always important to specify what kind of profitability we are talking about.
Most often there is a profitability of the company, which is the profitability of sales. It can be gross margin or assets return, or personnel profitability and so on. Profitability is an efficiency index, but it is necessary to specify what kind of efficiency. One more time, the balance sheet will give you an understanding of assets and equity returns. That means you can understand how much of your own money is frozen in the business and how much profit it brings. And again, return on sales or (EBITDA) - operating profit - can be 15-20% and that's pretty much normal for many small businesses, but return on equity should be a multiple of that. At the level of small and micro businesses, the whole point is that you make it with small investments, i.e. you take a little of your own money and borrow more. And you do not have to look for an investor or lender, you can borrow on consignment of goods, on payroll of your staff, to sell against advance payments from customers and this money to put into circulation.
Balance sheet and its usefulness for the company
Investors pay a lot of attention on company balance sheets before investing. Interested parties are looking for income statement and balance sheet on a regular basis, at least monthly. They cover the entire picture of a business; they work in tandem with each other. Credit and debit of the company at a given time compilate the balance sheet. The stability of a company's balance sheet can be assessed by three broad categories of investment quality. They are short-term liquidity (or working capital), asset ratios and capitalization structure.
Balance sheet is like a healthy lifestyle, it’s beneficial, but not all of the people like it. It looks really complicated or optional, like something for accountants. In fact, only financial specialists use huge statements. Business owners need simple and clear report, which gives an information about:
- what company owns and its indebtedness;
- where is profitability from;
- how much money could be cycled out of business.
The balance sheet is the tip of accounting reports, which reflects the financial performance of the company for the year, taking into account its assets and liabilities.
The balance sheet is the tip of accounting reports, which reflects the financial performance of the company for the year, taking into account its assets and liabilities. It shows the increase or decrease of the company's capital, the structure of assets (what the company owns) and liabilities (to whom the company owes). If a business owner knows how to "read" such a report, he will be able to perform important analytics for strategic planning. Analytical ratios are also calculated on the basis of the balance sheet. They characterize the investment attractiveness, the financial solvency of the business, and the ability to fulfill obligations to banks and other creditors.
Let's look at the simple example with a balance application. Two friends decided to start a business selling office equipment. They invested $700 each and became shareholders in the business.
It is necessary to digitize each participant's investment before starting the business in order to avoid problems with paying dividends in the future. In this example, the investments are equal, so the dividends will be divided equally, but it can be any percentage. The shareholder can also invest his or her property. The business investment is uncompensated; it is not a loan of money to the company. With favorable development, this money will bring income in the form of dividends for many years, but it is impossible to guarantee a success, the company may go bankrupt.
Assets are what an organization owns that can make a profit. Stock of goods, money on the account and in cash, property, site, licenses. Assets are divided into two groups: current and non-current.
Current assets change form during the financial cycle. These are money, stocks, and receivables.
Receivables are money that customers owe the company. If the company works with post-payment, customers receive the goods first and pay some time later. This money can no longer be considered as a finished product. It has left the storage house, but it can't be spent yet; the customer can pay later.
The second part of assets is non-current. These are assets that are preserved during the financial cycle, their defining features:
- long-term using, with a lifetime of one year or more;
- are expensive, the company can determine which acquisition is considered expensive and fix it in its policy.
Non-current assets are divided into two groups:
- fixed assets, which are tangible assets, things that can be "touched": buildings, facilities, equipment, vehicles;
- Intangible assets that do not have a physical form, but they can be valued: licenses, websites, patents.
For example, it is possible to invest the profits in the business development and make a website to post goods on it. The value of the site is an investment of intangible assets. The structure of liabilities does not change, and the money to pay for the website is moved from the group "Cash" to "Intangible Assets".
Assets do not automatically generate profits. Finished products in the storage house do not guarantee an income; they still have to be sold. Every businessman hopes that the investment will pay off, but no one can guarantee the success.
If the company gets into a cash gap, you can always look at the balance sheet and see where the money has "hidden". Is it a large accounts receivable? Work with clients, reduce deferrals. Is it a lot of inventory? Make an inventory of storage houses, optimize production, give discounts for finished goods. If everything is invested in non-current assets, think what can be abandoned.
Balance sheet. A financial statement of the company reporting shareholder equity, assets and liabilities is a balance sheet.
Crucial financial statements. There are three crucial financial statements for evaluating business. They are the income statement, cash flow and balance sheet.
Financial picture. A balance sheet shadows a financial picture of a company (what it owns and owes) at a certain point in time.
Accounting equation. Balance sheet has three sections: assets, liabilities and owner’s equity. This statement represents the accounting equation. Everything you own is equal to everything you owe plus your owner’s equities in a business. So, the balance sheet corresponds to a sum of liabilities and equity equated to assets.
Financial ratios. Fundamental analysts determine financial ratios through balance sheets.