Do your eyes glaze over every time someone starts talking numbers? Believe me, I get it. I am not an Accountant for a reason. However, to be successful in business there are some essential financial skills that you must have. Every action leaders take has some sort of financial consequence. Some will be obvious and will reflect clearly in financial statements. Others could be hidden costs or simply missed opportunities. That is why basic financial knowledge is so important.
To cover everything would take many pages of information. Whole books are written on this topic. So, in today’s post I am covering the balance sheet, also referred to as the statement of financial position. It represents the current status of the business and all transactions recorded at that specific point in time that the balance sheet is dated. Most commonly it is done at the end of a month, quarter or year. A balance sheet describes the financial position of the company in terms of Assets = Liabilities + Owner’s Equity. As you read through some of these terms, think about how they apply to your business unit and your company as a whole.
Asset – the things in which your company invests so they can conduct business. Ex. Cash, Raw Material Inventory, Finished Goods, Land, Buildings, Equipment
Accounts Receivable – money owed to a company by others
Current Asset – those that can be easily converted to cash within one year. Ex. Inventory, Accounts Receivables
Fixed Asset – those assets that are not easily turned into cash. Ex. Buildings, Equipment
Depreciation – most fixed assets depreciate or become less valuable over time. On a balance sheet, assets are reported as the cost of the asset at the time of purchase, not the current market value. So, depreciation is not factored in to the line item of the asset. Depreciation is factored in later in the assets under a line item called accumulated depreciation. So, in the end, the balance sheet will reflect the current value of the asset.
Liability – money owed to creditors including unpaid bills. Ex. Loans, Wages, Taxes
Accounts Payable – money owed by a company to others
Current Liabilities – claims of creditors and others that typically must be repaid within a year. Ex. Salaries, Accounts Payable
Net Working Capital – subtract current liabilities from current assets.
Owner’s Equity or Shareholders’ Equity – the book value of the company.
Too little working capital could put the company in a position where they may be unable to pay their bills. Too much reduces the profitability of the business because it costs money to carry that capital.