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pAs a a href=http://www.businessconsultingabc.com/ target=_blankBusiness Plan Consultant/a, I often seenbsp;businesses concentrate on their Profit and Loss Statement and Cash Flow Statement without much consideration to the Balance Sheet.nbsp; This is a mistake!nbsp; The Balance sheet is important because it:/p
ul
liShows the event of past decisions/li
liKeeps track of a companyrsquo;s cash position liquidity/li
liRecords what the Ownerrsquo;s Equity position is at different time intervals/li
liinstantly affected by the Cash Flow and Income Statements, which reflect the status of the companyrsquo;s operation/li
lispeedily shows the Condition of a Business/li
/ul
pThe Balance Sheet illustrates how a Companyrsquo;s Assets, Liabilities and Net Worth are distributed at a given point of time or time period.nbsp; The Balance Sheet set format facilitates analysis.nbsp; The order of the Balance Sheetrsquo;s itemized categories is arranged in the order of Decreasing Liquidity and Immediacy for Assets and Liabilities respectively.nbsp; Because the Balance Sheet shows changes in Debt, Net Worth and the Companyrsquo;s condition over time, it is an excellent tracking and control document.nbsp; Before getting into Balance Sheet Analysis, letrsquo;s examine the important sections of the Balance Sheet (please see the Balance Sheet example (simple format) at the end of this article)./p
ul
listrongCurrent Assets:/strongnbsp; Cash, Government and Marketable Securities, Notes Receivable, Accounts Receivable, Inventories and Prepaid Expenses.nbsp; Any other item that can be converted to Cash inside one year./li
listrongFixed Assets:/strongnbsp; Land, Plant, Equipment, Leasehold Improvements.nbsp; Other items that are expected to have a useful business life which can be measured in years./li
liDepreciation applied to items that wear out./li
listrongOther Assets:/strongnbsp; Intangibles such as Copyrights, Patents, Contract Exclusivity and Notes Receivable from Company Employees and Officers./li
listrongCurrent Liabilities:/strongnbsp; Accounts and Notes Payable; Expenses that Accrue (such as Wages, Salaries, Withholding, FICA); Taxes Payable; Current part of Long Term Debt; and other Obligations coming due within a year./li
listrongLong Term Liabilities:/strongnbsp; Trust Deeds, Mortgages, Equipment Loans and Long Term Bank Loans.nbsp; All of these are Net of the current part of Long Term Debt (appears as a Current Liability)./li
listrongNet Worth:/strongnbsp; Assets minus Liabilities./li
listrongOwners Equity:/strongnbsp; Principals Equity Stake, Retained Earnings and other Equity./li
/ul
pstrongAnalyzing The Balance Sheet/strong/p
pThree ways to quickly determine the health of your business:/p
p1)nbsp;nbsp;nbsp;nbsp; strongAnalyze Working Capital:/strongnbsp; Subtract Current Liabilities from Current Assets to determine your Working Capital level.nbsp; Cash is only part of Working Capital./p
p style=padding-left: 30px;a)nbsp;nbsp;nbsp;nbsp; Illiquid Businesses can have a hard time securing future loans.nbsp; Solutions are Working Capital Loans, Fixed Asset Sale, Financing Accounts Payable or Securing New Equity Investment./p
p2)nbsp;nbsp;nbsp;nbsp; strongCompare Fixed Period Balance Sheets:/strongnbsp; By comparison similar periods of time, you can quickly spot Trends and Weak Areas, which upon investigation, you can determine the reasons driving them.nbsp; If you are an established Company, compare yearend Balance Sheets.nbsp; If a new company, compare Balance Sheets from one quarter to the next.nbsp; Upon analysis, problem areas and strong areas jump right off the paper!/p
p3)nbsp;nbsp;nbsp;nbsp; strongCurrent and Acid Test Ratios:/strongnbsp; These analyses are percentage verses dollars based so it is easy to compare against industry and area norms of similar companies./p
p style=padding-left: 30px;a)nbsp;nbsp;nbsp;nbsp; strongemCurrent Ratio:/em/strongnbsp; Measures a Companyrsquo;s Liquidity or its ability to meet current obligations in the next year./p
pnbsp;nbsp;nbsp;nbsp;nbsp;nbsp;nbsp;nbsp;nbsp;nbsp;nbsp;nbsp;nbsp;nbsp;nbsp;nbsp;nbsp;nbsp;nbsp;nbsp;nbsp;nbsp;nbsp;nbsp;nbsp;nbsp;nbsp;nbsp;nbsp; i.nbsp;nbsp;nbsp;nbsp;nbsp;nbsp;nbsp; emFormula:/emnbsp; Current Assets divide; Current Liabilities/p
pnbsp;nbsp;nbsp;nbsp;nbsp;nbsp;nbsp;nbsp;nbsp;nbsp;nbsp;nbsp;nbsp;nbsp;nbsp;nbsp;nbsp;nbsp;nbsp;nbsp;nbsp;nbsp;nbsp;nbsp;nbsp;nbsp;nbsp;nbsp; ii.nbsp;nbsp;nbsp;nbsp;nbsp;nbsp;nbsp; In order for the analysis to mean anything it is important to understand what is represented by this ratio.nbsp;/p
p style=padding-left: 150px;Factors affecting the Current Ratio are Type of Inventory, Quality of Receivables, Sales Cycle Timing, Time of Year, etc.nbsp; A ratio of 2.0 typically represents a healthy company but it really dependent on the type of company and industry./p
p style=padding-left: 30px;b)nbsp;nbsp;nbsp; strongemAcid Test:/em/strongnbsp; The ldquo;Quick Ratiordquo; is derived by dividing a Companyrsquo;s Most Liquid Assets by Current Liabilities.nbsp; Liquid Assets include Cash, Securities and Current Accounts Receivable.nbsp; A ratio of 1.0 typically represents a healthy company but is company and industry particular./p
pstrongNote:/strongnbsp; A 2.0 Current Ratio and 1.0 Acid Test (Quick Ratio) benchmarks are non-industry specific.nbsp; Be sure to investigate the healthy levels for companies closely resembling yours.nbsp; Trade Associations, Banks and Dun amp; Bradstreet are good sources of ratio comparative information.nbsp;/p
pstrongemFootnotes:/em/strongnbsp; Footnotes of assumptions and calculations are very important for a 3suprd/sup Party reviewer, such as a Banker.nbsp; A Bank would be concerned in how restricted your Assets are, so an explanation for each Asset item would be in order.nbsp; An investor would be very interested in the details of Owners Equity.nbsp; A Banker would also be interested in a breakdown of Accounts Payable, detailing exactly when liabilities come due./p
pSo when you are preparing your a href=http://www.businessconsultingabc.com/Writing_An_Effective_Business_Plan.html target=_blankBusiness Plan/a or updating your a href=http://www.businessconsultingabc.com/Strategic_Plan_For_Business_Success.html target=_blankStrategic Plan/a, or analyzing your companys profits and cash flow, dont forget to include analysis of your balance sheet./p
pstrongExample Balance Sheet/strong em(Simple Format)/em/p
pstrongAssets/strong/p
pCurrent Assets/p
pFixed Assets/p
ul
li(Less) Accumulated Depreciation/li
liNet Fixed Assets/li
/ul
pOther Assets/p
pstrongTOTAL Assets/strong/p
pstrongLiabilities/strong/p
pCurrent Liabilities/p
pLong-Term Liabilities/p
pstrongTOTAL Liabilities /strong/p
pstrongNET Worth / Owners Equity/strong/p
pstrongTotal Liabilities amp; Net Worth /strong/p
pnbsp;strongAbout this Article Author/strong/p
pFrank Goley is a business plan consultant, business consultant and business turnaround consultant for ABC Business Consulting. Frank is an expert in writing, developing and implementing business plans, business turnaround plans, business funding plans, marketing plans, strategic plans and web marketing plans. Frank offers comprehensive business consulting, business coaching, business turnaround consulting, along with web seo, web development and web marketing consulting, to small and medium size companies.. Frank is author of the business plan book, strongemThe Comprehensive Business Plan Workbook ndash; A Step by Step Guide to Effective Business Planning/em/strong, and he has over 50 published articles on business success strategies. He also writes the Business Success Strategies Blog./p