Data Driven Decisions: Balance Sheet
As discussed here, data-driven decisions are much more effective than going with your gut. We’ll now dive into using the balance sheet for decision making.
What is a balance sheet?
A balance sheet details a company’s assets (anything of value), liabilities (financial obligations, debt) and owners equity (net worth). This information can be used to identify improvement opportunities and drive decisions for funding growth. It also helps understand a company’s overall financial health with a view of liquidity (availability of cash) and solvency (ability to pay debt).
Assets
Assets are resources of value used in business operations. They are divided into Current assets and Fixed assets. Current assets are more liquid and include items like cash, accounts receivable, and inventory. Fixed assets are resources used in company operations over multiple years. Fixed assets can be tangible (land, buildings, equipment, machinery, vehicles, etc) or intangible (licenses, copyrights, patents, trademarks, mineral rights, etc).
Liabilities
Liabilities are a company’s financial obligations and debt. They are separated into Current liabilities and Long term liabilities. Current liabilities are financial obligations due in the next 12 months, including accounts payable. Long term liabilities are financial obligations due beyond 12 months.
Owners Equity
Equity is the net worth of the company. It is the difference between assets and liabilities. In a privately-held company, the balance sheet reflects Owners equity - the value of the company that an owner can claim.
Using a balance sheet as a business owner
Business owners can use a balance sheet to:
Identify opportunities for improvement, such as reducing inventory levels or receivables
Determine how to fund growth either through debt, liquidation, or raising capital
Assess financial health by ensuring assets covers liabilities and will support ongoing operations
A balance sheet also contains the data needed to calculate Quick Ratio and Debt-to-Equity Ratio.
When assessing a balance sheet, bear in mind that it is based on a point in time. It is prudent to look at data over time before incorporating it into decisions.
