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How to understand your balance sheet: A beginner’s guide

How to understand your balance sheet: A beginner’s guide

A balance sheet is a financial statement that provides an overview of the company’s assets, liabilities, and equity at a specific point in time. It is important to know what each one means in order to understand how well you’re doing. It can be difficult to understand all the information on this document, but there are ways to break it down into more manageable pieces.

 

What is a balance sheet?

The balance sheet is a financial statement that provides information about the assets, liabilities, and equity of a company.

The first section of the balance sheet lists the assets on hand. Assets are anything that can be turned into cash. Assets include cash, accounts receivable (money owed to you), inventory (goods waiting to be sold), and prepaid expenses (e.g., insurance that is paid annually in advance). Assets are usually broken up into short-term (less than one year) and long-term (one year and longer)

The second part lists liabilities, which are things you owe money for. Liabilities include loans payable or due for goods purchased on credit. Like assets, liabilities are usually broken up into short-term and long-term.

Finally, equity is calculated by subtracting what you owe from what you own. This is also referred to as net worth or the net value of the business.

 

The importance of the balance sheet

Balance sheets are a snapshot of what a company’s assets, liabilities, and equity look like at any given point in time. A balance sheet is a tool that can be used to find out if a company has enough money to cover its obligations and stay afloat or enough assets to cover its long term obligations.

The balance sheet can also be used to determine how a company is financing its operations. A company that is generating enough net income will have higher retained earnings from one year to the next. A company that is financed through debt will have an increase in long-term liabilities year-over-year.

 

How to read a balance sheet

Below is an example of a balance sheet.

balance sheet

We already explained assets, liabilities, and stockholder’s equity. The balance sheet must always “balance” because assets equal liabilities plus equity (known as the accounting equation). Understanding this equation helps you understand a company’s position. If the company has more liabilities than assets, then it will have negative equity, which is a potential major red flag especially with mature businesses.

Investors and creditors like to determine a company’s financial health using something called ratio analysis. To determine how liquid a company is, divide current assets by current liabilities. In the example above, 67,500 / 34,200 = 1.92. Whether that is good or bad depends on the industry. In general, anything near or over 2.00 is acceptable.

Other performance indicators include solvency ratios (also called financial leverage ratios), profitability ratios, efficiency ratios, and coverage ratios. Corporations also have market prospect ratios which are used to predict performance, which is imperative when valuing a company’s stock price.

 

How to use information from the balance sheet to improve your finances

Did you know the information found on a balance sheet can also be used to measure your company’s vulnerability to risk? A complete balance sheet includes key pieces of information like cash on hand, accounts receivable and inventory. By analyzing these numbers, you will be able to see where your business is strong or weak in relation to other companies in similar industries. If there are any areas for improvement (i.e., too much debt), it will allow you time to prepare so that when the unexpected happens.

If you want to take control of your finances and improve them, the balance sheet is a good place to start. Understanding what it includes and how to read one will provide insight into where you can make changes in order to get more money for yourself or avoid unnecessary expenses that are taking too much from your paycheck.

The best way to use this information is by comparing two different months side-by-side on paper so that you have everything at hand. Once you have done this, focus on adjusting only those areas which seem most important – like lowering debt payments or reducing inventory on hand – and see if there is an impact in your bottom line!

The balance sheet is a powerful financial tool that can be used to improve your finances. It’s important for you to understand how the information on the balance sheet works and what it means in order to make informed decisions about improving your money management skills. Let us know if we can help! Contact our team of experts today and let them show you how they have helped others grow their wealth with remarkably simple math.

5 Financial Reports You Should be Running

5 Financial Reports You Should be Running

There’s an assortment of financial reports involved in business accounting and bookkeeping. Each one contains the information you need to form an accurate and holistic view of your company’s financial health. There are five reports you should be running on a consistent schedule when you own any small business, especially wineries. Keep reading to learn why these reports are crucial to the success of your company.

 

Profit and loss

A profit and loss report, also called a statement of operations, provides an overview of your winery’s key performance factors. The frequency of P&L reporting varies – monthly, quarterly, and annual statements all have their place. The goal of P&L reporting is to track sale trends and profit ratios over time.

To complete the report, an accountant compares the income of your business against all sorts of expenses. These include how much it costs to sell your products, admin expenses, taxes, interest on loans, marketing budgets, and so on. The sum of your business expenses is then deducted from the sales revenue to determine your company’s net income.

It’s important to collect and review these reports over time. On report is a snapshot in time. Several forms a dynamic assessment of how well a business is doing. This data is invaluable if you want your small business to thrive for years to come.

 

Balance sheet

The process of fermenting, bottling, and selling wins is lengthy. Every winery depends on a mix of liquid accounts and long-term investments to support such time-consuming operations. A winery is also likely to have short-term and long-term liabilities and financial backing from shareholders.

These factors are tabulated and compared when your accountant prepares a balance sheet. You’ll find that there are two sections to any balance sheet: one, a summary and breakdown of all company assets, and two, a summary and breakdown of all company liabilities.

The assets section will include the cash you have to spend, the value of your inventory, the equipment you own, and any accounts receivable on your books. The liability section includes accounts payable, unearned revenue, and long-term debts. The final calculations reveal your company’s net worth. Reviewing yearly balance sheets is an excellent tool to track the growth of your winery.

 

Statement of cash flow

The revenues and expenses of a business fluctuate frequently. And while P&L reports and balance sheets provide immense data sets, they don’t always offer the precision you need. A statement of cash flow allows you to record, track, and predict the actual amount of cash your business has on hand during a given time period.

For example, a winery needs to invest money in multiple pieces of bottling equipment. The cost of the initial purchase, interest owed, and the depreciation of value are all accounted for in monthly expense reports. However, the depreciating value of machinery doesn’t actually remove money from your account.

Instead, a cash flow statement only tracks your liquid assets. Regular cash flow reporting will show you the amount of cash you have on hand throughout each week, month, or quarter. Wineries can use these reports to predict how much cash they’ll have at a future point and enables them to make long-term plans.

 

Net profit margin over time

The net profit margin of your company is crucial to seeing and developing success in the long term. The basis for this type of report is the net profit margin ratio. The ratio divides your business’s net profit by the amount of revenue earned. To phrase it another way, this report explains how much your net worth grows with every dollar of revenue you earn.

A net profit margin report should be completed frequently. It provides an inside look at how effective your investments in inventory and labor are at producing money from your company. Knowing the profit margins for your company is the first step to course correction when you start losing money.

 

Accounts receivable versus accounts payable

Reporting accounts receivable versus payable is vital for daily operations and long-term financial planning. These types of reports document either your liabilities or your assets in real time. This information is needed to pay debts on time, budget for upcoming expenses, and ensure your books are accurate as well.

Accounts receivable reports detail outstanding money that your business is owed. In a winery setting, you might have receivable assets because a local market purchased several cases of wine to stock their shelves. Payable accounts are liabilities you are expected to pay. This includes expenses like rental space and raw goods inventory.

 

Conclusion

These five reports are the pillars of your business’s financial health. They require the utmost accuracy and need to be completed on a frequent basis, which is why Protea Financial can help. As a small business owner, it’s difficult to find time to manage all accounting and bookkeeping. Compiling and reviewing reports on a regular schedule is a challenge.

Additionally, few business owners have the training and expertise required to prepare reports correctly. Protea’s certified accountants and bookkeepers are ready to help. Your dedicated team will ensure that every transaction, asset, and liability is accurately reported. This means you can focus your attention on reviewing the big picture and deciding how best to grow your business.