Ask SCORE
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For
newcomers to business, a balance sheet may appear at first to be a complex =
and
confusing collection of numbers. However, this financial statement contains
valuable information for assessing the health of your company and make
decisions on which direction to take.
A b=
alance
sheet is like a snapshot of your company at a single moment in time. The
balance sheet shows how the capital within your business is distributed over
the various accounts. A surplus of assets over liabilities indicates
profitability. If the statement shows more liabilities than assets, however,
your company is at a loss position--not necessarily cause for alarm, depend=
ing
on the longer trend. For example, a business may have a month with high
expenses and a net lost that may be more than offset by five months of
profitability. On the other hand, three consecutive losing months should pr=
ompt
the owner to make serious decisions about how to overcome the negative cash
position.
Com=
pare
balance sheets over a period of time for the big picture of your assets and
liabilities. By comparing these on an item-by-item basis, you can spot tren=
ds
that will affect your firm’s overall financial health. For example,
larger quantities of merchandise on hand from one period to another reflect=
a
decision to buy ahead because of continuing inflation. Receivables may show=
a
continuing upward trend when collection of outstanding accounts exceeds 30
days. Debts may run higher when the firm expands or makes capital improveme=
nts.
Muc=
h like
the balance sheet, the profit and loss statement (or operating statement)
totals the result of operations over a selected time period. This statement
will show sales volume, cost incurred and the amount of profit or loss.
Comparing the monthly or quarterly profit and loss statements can be reveal=
ing.
Why was there a lower gross profit for several quarters? Did price cuts
decrease per sale profitability? Was a higher
proportion of sales spent on operating costs such as personnel, rent or
insurance? Are overhead costs increasing routinely?
Do =
not rely
solely on your accountant for advice and guidance in understanding your bal=
ance
sheet. As the decision-maker for your company, you need a clear understandi=
ng of
how to read, interpret and act on financial information.
If =
you
would like to discuss this topic or business planning, business growth
strategies or a specific business issue, contact SCORE® “Counselors to
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