5 Steps to Understand Balance Sheet.

1 Know Your Assets and Liabilities.

Whether you’re a small business owner or a large multinational conglomerate, your balance sheet will always have the same format: assets and liabilities.

An asset is a positive balance, while a liability is a negative balance. For example, an office block you own outright is an asset, but a business loan you took to start up the business is a liability.

2 Current and Non-Current Assets.

A current asset is something that represents ready access to cash. For example, savings in the bank or existing stock inventories are current assets.

A non-current or fixed asset is something that couldn’t easily transform into cash, such as property or equipment.

If you’re seeking investment in your business pay close attention to the current assets on your balance sheet. Investors love to see a lot of ready cash already in the business, such as existing positive bank balances or lots of products in stock.

3 Reading Your Liabilities.

You’ll see two types of liabilities on your balance sheet: long-term and current.

A current liability is due to be paid within the financial year. This could be accounts payable to suppliers, or a portion of long-term debt repayments due within the month or year.

4 Understanding Receivables.

Receivables are payments that customers owe your business. A large amount on the receivables section of your balance sheet reflects financial inefficiency. The longer it takes your business to chase up and collect money owed, the less efficient your processes are.

5 Shareholder’s Equity.

Your balance sheet needs to be equal, which it won’t be if you’re only looking at assets and liabilities. To make your financial ‘in and outs’ balance out remember to list shareholder or founder equity, too.

For more information contact us now!