To understand the value of your company, you need to look at its overall financial position. Fortunately for many businesses, this can be periodically prepared through a company’s balance sheet.
A balance sheet is the primary financial tool for assessing the relative wealth and financial condition any business is in at any given point in time. It is often referred to as a snapshot because it gives you a fairly clear and accurate picture of where the business is at that current moment. In a balance sheet, you will find frequent data that analyzes the business and its finances in various ratios. In many cases, these ratios make comparisons and spot important trends that are either are negative or positive for a company. In a balance sheet, you will find three major categories: assets, liabilities, and stockholders’ or owners’ equity. With these three categories, you will be able to financially view your company and see the overall direction it is head in the future.
When we talk about assets, we generally refer to two specific groups: current assets and fixed assets. These numbers represent what a firm owns by providing an economic value that an individual, corporation, or entity controls, with expectation that it will provide future benefit. This cash value is then compared against a company’s liabilities. Liabilities, by definition, are a company’s legal debts, expenses, and obligations that arise during the course of a business operation. Usually these liabilities are settled over time, especially during the course of a company’s growth. By taking the asset amount and the liability amount, you are able to find the stockholders’ or owners’ equity, the overall net worth of the company. The equity is found simply by finding the difference between the value of assets and the cost of the liabilities. For example, if someone owns a house worth $500,000 dollars but owes $100,000 for the mortgage, the house represents $400,000 equity.
By comprehending these numbers, you will be able to understand the financial health of your business. Yes, many people have accountants to crunch these numbers. But to be an effective leader, knowing the data on your balance sheet will give you leverage to understand a variety key factors that can influence your business such as your company’s working capital, cash levels, inventory levels, fixed assets, and most importantly, long-term debt. This type of understanding will allow you to see the direction your company is heading and future strategies you can implement to move it towards its financial goal. Keep in mind, many companies often overlook the numbers. Doing so can often lead to bankruptcy and liquidation. If you are looking to run a successful business, know these numbers like the back of your hand and plan accordingly.