| If you want to do well as a small business owner, | | | | company’s net worth. |
| it would help you if you could understand the | | | | So now that you understand the basic |
| basics of how to read a balance sheet. The | | | | components of the balance sheet, let’s take |
| balance sheet is an indispensable part of a | | | | a look at what types of analysis can be |
| business accounting information and is essentially a | | | | generated from it. |
| snapshot of a company at a specific point in time. | | | | The information in a balance sheet is used to |
| The balance sheet lets you know what a | | | | generate many different types of financial ratios. |
| company owns (“assets”) and what it | | | | Though we will not get into the mechanics of |
| owes (“liabilities”). It will also tell you how | | | | these ratios in this article, it is important that you |
| much the business is worth. | | | | understand that they are used to gain insight into |
| The company’s assets can normally be | | | | many diverse aspects of the business. |
| divided into current assets and non-current assets. | | | | Debt-to-equity ratios, for example, will show how |
| Current assets have a high liquidity value and can | | | | extensively the company relies on debt to finance |
| be turned into cash quickly. Some examples of | | | | its growth. Financial strength ratios will tell you |
| current assets which are stated in a balance | | | | how good the company is at repaying its debts. |
| sheet are cash, accounts receivable (also called | | | | In conclusion, the balance sheet’s purpose is |
| debtors), and inventory. Non-current assets, on | | | | to let you know the business’ financial health |
| the other hand, cannot be easily converted into | | | | and liquidity at a selected point in time. Investors |
| cash. Some examples of non-current assets are | | | | and lenders prefer that the current assets of a |
| machinery, buildings, or real estate. | | | | company are higher than the current liabilities |
| The company’s liabilities can also be divided | | | | because it means the company will remain solvent |
| into current and long-term liabilities. Current liabilities | | | | in the immediate term. Cash shortages are then |
| are debts that the company must pay back in | | | | unlikely and the company will not have to rely on |
| less than a year. Some examples are accounts | | | | additional funding to meet its obligations. |
| payable and 12 months of interest payments on | | | | If you dig a little deeper into the types of analysis |
| longer-term loans. Long-term liabilities are debts | | | | that can be done with balance sheet items, you |
| that are due after a minimum of one year. | | | | just might be fascinated. With a little basic |
| Shareholder’s equity is made up of the | | | | knowledge, you’ll impress you bank manager |
| money that was invested into the business at its | | | | and even your accountant! |
| start and retained earnings. Retained earnings are | | | | If you are interested in learning more about how |
| profits that are not paid out to the | | | | to measure the health of a company, read my |
| company’s owners but are re-invested into | | | | article called the “Top 5 Warning Signs that |
| the company. Shareholder’s equity is the | | | | your Business is Declining”. |