Balance Sheet by Bend Business Development Center at Central Oregon Community College
Dear Business Counselor,
I keep all my records on my computer. It gives me lots of reports. One is my Balance Sheet. What does it tell me?
Baffled in Bend.
Dear Baffled,
One of the most important tools which can be used to analyze a small business's financial condition is it's Balance Sheet. A Balance Sheet is a "snapshot" of a business's financial status on any particular day. There are three parts to every balance sheet: Assets, Liabilities, and Owner's Equity. The sum of Liabilities plus Owner's Equity must always balance with the Assets. Thus the term "Balance Sheet". Total Assets consist of Current Assets (Cash, Accounts Receivable, and Inventory) plus Fixed Assets (Property the business owns such as Buildings, Production Equipment, Fixtures etc.).
Total Liabilities consist of Current Liabilities (Accounts Payable and any other short term debts owed) plus Long Term Liabilities (Long Term Debts such as a business loan or mortgages on property). The difference between the total assets and the total liabilities is called "Owner's Equity".
Two of the measures which can be determined from the Balance Sheet are Liquidity and Debt. Debt indicates how much of other people's money is being used by the business to operate. Liquidity is the ability to meet financial obligations. The most dependable indication of liquidity is called "Current Ratio" and is calculated by simply dividing current assets by current liabilities. A current ratio of "2", would indicate that a company could lose 50% of it's current assets and still be able to meet it's current liabilities. Most analysts or lenders would consider this a good margin of safety. The percent of owner's equity is calculated by dividing owner's equity by total liabilities and multiplying by 100. Most lenders like to see a percentage of at least 30% unless there are other guarantees. The more indebtedness a business has the greater the risk of failure.
Ratios from the balance sheet can be looked at as a report card at the end of a year, or compared to past years or even to similar businesses.
At the COCC Small Business Center we stand ready to help any business owner analyze and interpret their business’s balance sheet or any other financial data. We are located at 63085 N Hwy 97 in Bend and our phone number is 383-7290.
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The Oregon Small Business Development Center Network’s funding partners
include sixteen community colleges, three regional universities,
the U.S. Small Business Administration and the Oregon Economic & Community Development Department.
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