If you read no other document associated with your business, be sure and read the balance sheet.
What’s a balance sheet? It’s a business’ statement of assets, liabilities, owners equity, and retained earnings at a given point in time.
Does that sound like something you’d like to read if you were buying a business or playing a key role in a company or if you owned a company?
Besides the obvious reasons to want to see this document, did you know there are some “hidden gems” contained in it? Let’s sample a few of the details you could find:
- What the company is owed by customers (accounts receivable).
- How much debt the company owes (short- and long-term debt).
- The value of the fixed assets (tangible and intangible) of the company.
- This is determined by looking at the accumulated depreciation.
- How quickly a company can settle their debt.
- This is determined by using a formula called quick ratio.
- It is a measurement of current assets (such as cash and receivables) divided by current liability.
- If greater than 1, the ability to quickly pay off current debt and payables is covered.
At the end of the day, you are looking for a complete picture of the value of the company. The simple equation is this:
- Assets = liabilities + shareholder’s equity
The more you know more about that liabilities component, the more you’ll be able to judge the true value of the company. By looking for and evaluating the “hidden gems” you’ll see the depth and complexity of the assets and liabilities.
For more on how to evaluate a company’s value, call or write to us. TFO Solutions is dedicated to helping entrepreneurs and business owners with their finances from the back office to the boardroom.