Financial documents can be intimidating, especially if you are not a trained accountant. Learning how to read your own balance sheet can protect you from mistakes made by your accountant or bookkeeper and help you bring in your projects under budget.
A balance sheet is sometimes called a “statement of financial position.” It shows a snapshot of your financial situation at the time it is produced.
They are called balance sheets because they balance two separate things – assets on the one side and liabilities and shareholders’ or owners’ equity (sometimes called net worth) on the other.
Balance sheets generally come in two formats – one has the assets on the left and the liabilities on the right, the other has assets on top and liabilities below. You can produce your balance sheet in the format you find the easiest to read. If your balance sheet does not match, the math is incorrect somewhere. Now look at the assets – they are organized from most liquid (i.e. cash) to least liquid (i.e. real property) – this tells you what your company owns very quickly and how useful it is in emergency. On the liabilities side, accounts are organized from short term to long-term (i.e. mortgages). This allows you to work out which ones you can pay off faster to improve your company’s position.
Once you have your balance sheet, you have a snap shot. To use it properly, you need to keep taking these snap shots. You should take a balance sheet at least quarterly. It can also be wise to take one before and then after a major project, especially if it is a project of a type and/or scope you have not attempted before – this can tell you if you billed correctly for the project. You can then use percentage change and other formulas to analyze how your business is changing over time. The debt-to-equity ratio is a particularly useful measure of your company’s health and financial leverage.
If you are still confused – then talk to your CPA, who will gladly help you better understand your balance sheet and other financial information such as income statements.
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