Most Financial Statements comprise a Balance Sheet and a Profit & Loss Statement.
In this article we’ll focus on the Balance Sheet.
Cutting it back to absolute basics a Balance Sheet is simply a record, at a point in time, of all:
- the Assets (the things the entity “owns”)
- the Liabilities (the things the entity “owes”)
- with the difference between the assets and liabilities being called the Owners Equity.
Owners Equity is just a fancy term for the net total of the recorded book value of the Assets, less the recorded Liabilities. This represents what the entity might theoretically be worth if the business was to be sold or wound up, assuming that the recorded book value of all the Assets and Liabilities could be converted to cash on that day.
Of course in the real world it’s highly likely that the value of the business will be very different to whatever is shown on the Balance Sheet.
For starters, the sale value on any particular day of plant and equipment, vehicles, land and buildings will almost certainly be different to the original purchase price of the item, less any depreciation since then.
Likewise hopefully there will be a “goodwill” value in your business, being the value a purchaser will pay for the good name, contacts and prospects they will be buying.
On the flip side, a purchaser will normally want a reduction or allowance in the purchase price for any employee leave entitlements that they are now taking on board. In my experience the majority of small to medium sized businesses do not take up a provision for leave entitlements so the Balance Sheet doesn’t reflect that liability.
There is any number of other examples where reality will be different to the recorded value, but something on paper is at least a start.
So there we have it – a Balance Sheet gives you an indication of what your business owns and owes, but it certainly doesn’t give a perfectly accurate reflection of the real value of the business.
If you’d like us to have a discussion with you about your Balance Sheet, please contact us.