|What’s A Balance Sheet?|
What’s The Balance Sheet Got to Do with It?
I showed you the importance of the cash flow statement last month. This might have lead you to ask, “If that’s the most important financial statement, then why do we even have the others?” Let’s take a look at the balance sheet, what it does and why it’s important too.
Essentially, the balance sheet is an indicator of how your business has done from its inception and gives one an idea of how the business will do in the future. For instance, if your liabilities are twice what your assets are, one might conclude that business has not been very good and that it may be headed for bankruptcy. If cash is low and fixed assets are high, the one could conclude that the business has used its cash to purchase assets which will in turn, make the business more money in the long run. The equity section shows how much has been invested in the business and how the past earnings have been since net income rolls into retained earnings from year to year.
Inventory turnover = Cost of goods sold/average inventory
Finally, the balance sheet is also great tool for comparing year-to-year or month-to-month business growth. The numbers can be compared directly to see if liabilities are decreasing as expected or to see if cash has increased. You can also run the same ratios for both time periods and compare those results. The most important thing is that you look at it regularly.
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