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