Can You Continue to Fund Your Business Growth? A Look at Your Balance Sheet

Can your membership business continue to fund its growth? The balance sheet can answer this for you right away.

Knowing how to read a balance sheet, you’ll also be able to have a relevant discussion about it — or a discussion about the balance sheet of a business you’re interested in acquiring.

In addition, the balance sheet has two other uses:

1) Vendors and lenders can use the balance sheet in considering the creditworthiness of the business.

2) Owners and potential investors can use it to help determine the value of the business.

Let’s look at the balance sheet to get a picture of your financial health.

Getting to Know the Balance Sheet

First off, the balance sheet helps you identify and analyze trends in the health of your business. Also, it reports on the financial condition of a business at a specific point in time.

Balance sheets show information from two or more dates, such as year-end information for the last two years.

Other key financial statements, profit and loss statements and cash flow statements, report financial activity over a given period of time.

Breaking It Down: How to Read a Balance Sheet

The balance sheet contains three parts:

1. Assets – what you own

2. Liabilities – what you owe

3. Owner’s Equity – the owner’s stake in the company

In addition, take a look at the example balance sheet below. The company and amounts are fictional. 

All About Assets

Let’s look at the left column first titled Assets.

What are assets?  Things a business owns that have monetary value, such as equipment, listed in order of liquidity. Liquidity is how quickly the items turn into cash.

Here’s an explanation of each line item:

Current Assets — assets that turn into cash within one year of the balance sheet date. Cash is the most liquid asset of every business.

Accounts Receivable — amounts customers, who made recent purchases on credit terms, owe the business.

Inventory — items the business purchases for resale to customers.

Prepaid Items — purchased items used and expensed on the profit and loss statement in a future period. A good example of a prepaid item would include paying an insurance premium six months in advance.

Fixed Assets — sometimes called Property, Plant, and Equipment (PP&E), non-liquid assets excluded from the current assets. Except for land, fixed assets depreciate over a period of years. List fixed assets at their purchased amounts, less accumulated depreciation to arrive at their net amount. Land never loses value and does not depreciate over a period of time.

A Look at Liabilities

What are liabilities? Liabilities are what the business owes to the various creditors and vendors. Like assets, liabilities contain two categories, current and non-current sections.

Again, an explanation of each line item from the top:

Current Liabilities — amount paid within one year of the balance sheet date.

Accounts Payable — monies owed to vendors and suppliers for items acquired on credit.

Wages Payable — owed to employees and taxes payable amounts due to governmental taxing authorities.

Unearned Revenue — Non-financial individuals do not understand this item often. Unearned revenue is money the business receives for services not yet rendered or product not yet delivered to the customer. When you receive the money but the service has not yet been rendered. A good example in the member-service industry is members paying membership fees in-full for the next year.  Examples would be a one-year martial arts membership or a six-month personal training package. 

What Financial Analysts Look for When Reviewing Your Balance Sheet

One of the most common ratios that analysts use when viewing a balance sheet is called Working Capital, which is defined as current assets less current liabilities. The current ratio tells the reader whether or not the company has the liquid assets required to pay its obligations owed during the next year. If current liabilities exceed current assets, the company has no working capital.

Current Ratio is another common ratio used which is current assets divided by current liabilities. Higher ratios indicate more liquid companies. It is possible to be too liquid as investors would view the company as sitting on idle cash and suggest investing elsewhere.

Non-Current Liabilities — amounts owed to creditors beyond one year ahead, also referred to as long-term liabilities. The most common long-term liability is bank loans. 

Owner’s Equity — this equals assets less liabilities. The equity is comprised of the owners investment into the company and the company’s retained earnings (versus distributed to the owners as dividends).

When All Is Said and Done

So now you have a basic understanding of what a balance sheet is and what the terms mean.

Remember that the balance sheet only shows a snapshot of the company at one particular date in time. It’s a useful tool to ensure your business finances are properly managed — and it can help uncover the true worth of your membership business.

Above all, to get the complete story on the health of your business, you must review the balance sheet, along with the profit and loss statement and cash flow statement.