Ever notice something about a balance sheet? It has a date at the top. Not a span of time, just one day. It’s usually the end of a year or quarter, but it can be the end of a month or any other date. What the balance sheet gives you is a snapshot of certain key facts about a business as of that date.
The word snapshot is important because the other financial statements we’ll describe are different. They cover a period of time and show how your company did over that period of time. The balance sheet, by contrast, tells you how you ended up – or where you are right now. (For this reason the balance sheet is sometimes called the statement of financial position.)
And what does it show? The balance sheet all by itself tells you some interesting and important facts about your company:
- Is the business solvent – that is, are its assets at least equal to its liabilities?
- Is the business sufficiently liquid – that is, does it have enough cash and other liquid assets to cover its short-term obligations?
- What do the company’s assets consist of? A balance sheet shows you how much money you have in cash or short-term investments. It shows you how much money you have tied up in inventory, plant and equipment. It also shows you how much you’re owed by other people.
- Who has a claim on those assets? A balance sheet doesn’t name names, but it does show you how much you owe to various categories of creditors – vendors, lenders, the government, etc. – and how much belongs to the owners of the business.
This is a series of 5 blogs that will be posted this week to help you understand one aspect of running a business that is crucial to be able to make informed business decisions for your business. Check back tomorrow to learn more about your balance sheet.
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