Learning to Balance Your Sheets
Balance sheet shows the financial situation of a company at a point in time (the balance sheet date). It includes three aspects: assets, equity and liabilities. And it is a complex process. It not only includes a large number of managing information, but also need to be analysed comprehensively with the income statement, cash flow, accounting policies and explanatory notes. This is how I came to hire out an accountant at contractoraccountants.com. I’ll never try to do my own books again. Clearly, the accounting degree exists for a reason and people like myslf who have no idea what they are doing should simply stick to what they’re good at!
Here, there are four main ratios groups when you’re analysing the balance sheet: profitability, management effciency, financial and investment. Balance sheet involves the management effciency and the financial. The profitability and the investment need to combine the income statement. Inventory turnover. It shows the turnover rate of the enterprise. Generally, if it’s commercial enterprise, the more higher, the more better. Accounts receivable collection period. The quicker, the better. It shows the speed we can regain the cash. Accounts payable payment period. It represents a source for free finance.
Current and liquid ratios. It shows the short financial situation of the enterprise. Is the current assets sufficient to redeem the current debt? How much to redeem the current debt when the current assets minus the inventory? We know sometimes there are some problems in turning the inventory into cash. Equity to assets ratio means your equity to assets ratio shows what proportion of total assets is financed by equity, and hence what proportion is financed by loans and non-equity shares.Balance sheet is one of basic financial statements. You must know income statement, cash flow, accounting policies and explanatory notes. And you should understand the difference between the balance sheet and income statement, and know the key of how to analyse the balance sheet.