Every business owner should be well versed with the various terms used in commerce, trading and business. As part of becoming a great entrepreneur, you should have a firm grasp of the concept of the balance sheet, understanding of what is a balance sheet and of course how to read a balance sheet. These are actually just simple ideas and principles that any businessman should have well kept in his mind, because this will enable him to make better business moves and plays to further strengthen his corporation.
The concept and use of the balance sheet is actually pretty simple, yet often misunderstood or taken for granted. Most of the time, businessmen feel they don’t have the time to go about it and learn how to read a balance sheet. There are also some businessmen who delegate such tasks to their financial advisers, accountants and other assistants, and although there is nothing wrong with delegation, it is still very important that you know something about what is a balance sheet.
What is A Balance Sheet?
Before we go into the details of the uses and steps on how to read a balance sheet and more, let us first get the general meaning and idea of the balance sheet. A balance sheet is a numerical representation of your corporation or business’ entire finances. It is what illustrates your company’s gains or losses through simple mathematical computations, particularly adding and subtracting from the company’s pool of finances.
So what does the balance sheet comprises of? All of the money that is spent, taken in, given to pay for equity, all spending and revenue, gross and net income are included in a business’ balance sheet. Normally a hired personal or company accountant does all the computation for you so you wouldn’t have the stress of putting together all these kinds of data. This, however does not excuse you from the responsibility that you need to understand the contents and learn the basics of how to read a balance sheet.
Basic Computation in The Balance Sheet
The key to understanding the importance of the balance sheet is to understand its contents. This will also make it easier for any company owner or even stockholder to know how much he is earning, how much the business is losing and how much capital has been spent over the past fiscal year or so.
You first start with listing down the total cash holding of the company. Cash is ready money which your business has on hand. This is what makes your business operations continuous. From there, you start to list down your receivables and total asset gains and revenue. After which, you may continue on to list down everything to be subtracted from the total income and funds of the company. This will include stockholder’s dividend, payments for amortization and bank debts, private equity charges, loss from liabilities and many more. The total from the deductions is your company’s current capital or funds.
If you are not good in the field of computing for money, you may easily have a professional do it for you, although, learning how to read it is a totally different thing. It is one thing to have the right computation and results but it is another to understand its compositions.
How to Read a Balance Sheet: Understanding Assets and Liabilities
One of the basic concepts in commerce that is being studied from business schools all the way to masters’ education is the principle of assets and liabilities. For regular people or those without any form of business, the concept of assets and liabilities only scratch the surface of what these terms truly mean and apply for. Part of learning how to read the balance sheet is to get a collected understanding of assets and liabilities and its deeper contexts.
An asset is something that a person, company or business aims to have to increase market value and promote capital gains. There are two major forms of assets; tangible and intangible. Tangible assets are infrastructures like other buildings and more in which the company makes money out of. Basically, an asset is something that a company owns and that is income generating by itself.
A liability on the other hand is something that the company has or owns but is draining money out of the corporation instead of generating it for the company. Most businessmen who don’t know how to differentiate an asset from a liability often take their corporations down to the gutter. If a possession of yours isn’t there to help increase your revenue, that is a liability. In learning how to read a balance sheet, you should see whether your total pool of income from your assets is far greater than the money subtracted from it because of your business’ liabilities.
Stockholders in The Balance Sheet
There are two general classes of businesses and corporations. The first one is a private company which is privately owned by a small group of people. These types of companies do not offer any stocks to the public, thereby closing all the income and profit among themselves. They do not sell or trade their shares to anybody outside their circle or board of directors.
A public company on the other hand, is a corporation owned by various people with stocks up for bidding in the public stock market. Everybody who has capital to invest is welcome to purchase as much stocks of public companies as they want. The debate on whether which class is better is an ongoing thing and is much more subjected to personal opinions and judgment.
Understanding these ideas is also important in the process of learning the balance sheet and its contents. For publicly owned corporations, the shares and dividends of the stock holders in total are also computed in the company’s finances. For private companies, there may also be dividend computations for the private shareholders but there is also a case of equity computation. Private equities are similar to mortgages but are paid directly to private equity investors. This too is subtracted from the overall capital of the business found in the balance sheet.
Simple Mathematics for Balance Sheets
Have you ever experienced budgeting your personal and private finances using a piece of pen and paper? Or have you ever done a list of all your debts alongside your possible receivables? You may think that the balance sheet is just for those with big businesses, or are made and read by those who have MBA’s or are professional accountants. The fact is, everybody with personal errands, financial obligations do their own form of balance sheets. In fact, there’s a good chance that you’ve done it several times in the past, albeit on a smaller and simpler scale.
These may not be as complicated as the formal business balance sheet, but that fact that you are writing down all your gains and loses, debts and payments is enough to prepare you to understand the concept of balance sheets further. Learning how to read the balance sheet is just simple mathematics combined with what appears to be complex business terms. The way to understand the costings and equivalents of the computation in the balance sheet is dependent upon how much you understand the meaning of assets, liabilities, equities, amortizations and many more.
As soon as you get the various business concepts in your head, computing for capital gains and losses will be a breeze. It will be just like in grade school when you were given an equation with lots of addition and subtraction in it. Reading and computing your balance sheet can be hassle free with the help of your personal accountant of course. But it will be much better to be hands on especially because it is your finances that these hired accountants are dealing with so double checking and recomputing isn’t a crime. It is a process that you should concern yourself with.