It’s time to make sense of all those numbers and assess your company’s financial standing. Your end-of-financial-year balance sheet indicates your company’s health in financial terms. And while it may look daunting when you first pick it up, it’s an essential inventory item in your business arsenal. Here’s how to interpret a balance sheet.
By Craig Falck for Africa Report
Photograph: © Stephen Coburn | Dreamstime.com
First things first: look at the headers. You should see three main groups, namely assets, equity and liabilities. These are the three major groupings that make up the financial standing of a business (assets = equity – liabilities). It’s important that you know what they include, as each header will have further sub-headers, such as current assets, non-current assets, current liabilities, non-current liabilities, and so forth). Your balance sheet should basically be one long list of every single thing that your company owns, owes and has invested.
Now it’s time to look at each of these sections individually. Under assets you will have objects that your company owns. Vehicles, equipment, stationery, property, buildings, stock… If it’s a tangible asset that you can see, touch and feel, it’ll fall under this header. It’s further broken down into the assets that are used on a yearly basis and those that are used on a longer-term basis, usually over three to five years – these are more often than not assets such as buildings and machinery that depreciate over a longer period. These indicate where the business has its money tied up and for how long. That makes up the one side of the balance sheet.
Equity and liabilities make up the other side of the document. Equity is basically how much money and shares the individual partners or members hold in the business and their worth, as well as where the business has spent money investing in other companies or shares. As for liabilities, these amounts are what is owed to your creditors by the business. It includes, as with assets, those that are short-term, such as accounts with suppliers that are paid monthly, and those that are longer term, such as bonds on property, leases, as well as large amounts owed on machinery and equipment.
Reading a balance sheet is easy – if you avoid panic and follow this advice. All you need to remember is that assets = equity – liabilities and you’ll be fine. Don’t worry about the size of the numbers on the page…As long as the two sides add up, you’re on the right track.
