The Balance Sheet is the first of The Big 3 Financial Statements that we’ll cover (The Income Statement and Statement of Cash Flows are the other two). An easy way to remember the Balance Sheet is to think of it as the “O’s” report. It reports what you Own (Assets), what you Owe (Liabilities), and what’s left Over (Equity/Retained Earnings). The formula for the balance sheet is:
Assets = Liabilities + Equity
As the name implies, the formula must balance so if you have $50,300 in assets, the sum of your liabilities and equity must also be $50,300.
Here is an example of a Balance Sheet as of 6/30/2016 from a training gym:
Bank Accounts: $20,000
Accounts Receivable: $ 1,800
Gym Equipment: $25,000
Office FF&E: $ 3,500
Total Assets $50,300*
Accounts Payable: $ 2,200
Current Loans Due: $ 5,800
Equipment Loan: $18,000
Total Liabilities $26,000
Retained Earnings: $16,000
Net Income: $ 8,300
Total Equity $24,300
Total Liabilities & Equity $50,300*
Assets (what you own) are what you use to run your business. They are listed on the balance sheet in order of their liquidity (how easily they can be converted into cash). So, all of the current assets are listed first and the non-current assets are listed next.
– Current Assets – have a life-span of 1 year or less, meaning they can easily be converted to
cash. Examples include cash, accounts receivable and inventory.
– Fixed Assets – are non-current assets that have a life-span of longer than one year & will not be turned into cash
within the next year. Examples include gym equipment, computers, buildings, goodwill (your
Liabilities (what you owe) are your financial obligations to outside parties. Liabilities are also listed according to liquidity.
– Current Liability – your bills that must be paid within one year. Examples include accounts
payable, short-term loans and the current portion due of long-term debt.
– Long-term Liability – debts and other financial obligations which are due in over one year. The
main example for gyms would be a loan.
Equity (what’s left over) represents your company’s total net worth. It is the sum of your initial investment plus or minus retained earnings.
That’s great but what does my Balance Sheet tell me?
First off, it’s important to remember that the Balance Sheet gives you a snap-shot of your company’s financial position at a specific point in time.
By analyzing the balance sheet, you can determine your ability to pay your bills, your operational efficiency and the net worth of your company.
One of my favorite ratios to use from the Balance Sheet is the Current Ratio (aka working capital ratio). The Current Ratio indicates whether your company has enough short-term assets to cover your short-term debt. If it doesn’t, indicated by a low Current Ratio (below 1), you may have a tough time paying all of your bills in the coming weeks or months. On the flip side, a high Current Ratio isn’t necessarily a good thing either as it could indicate that money is tied up in inventory or receivables are not being collected.
There is definitely more analysis that can be done with the balance sheet but the first step is understanding the basics. Feel free to contact me if you have any questions on the balance sheet.