Balance Sheet

Snapshot of financial position at a specific date.

A balance sheet is a financial statement that provides a snapshot of what a company owns and owes, as well as the amount invested by shareholders, at a specific point in time. It consists of three main sections: assets, liabilities, and shareholders' equity. Assets, both current and long-term, represent the resources controlled by the company. Liabilities, similarly divided into current and long-term, are obligations the company must fulfil. Shareholders' equity represents the residual interest in the assets of the company after deducting liabilities. The fundamental equation of a balance sheet is: Assets = Liabilities + Shareholders' Equity. This statement is crucial for assessing the financial health and stability of a business.

Imagine an e-bike shop, 🚲Ezee, with the following financial information as of December 31, 2023:

The balance sheet would look like this:

 

Assets Current Assets: £80,000 Long-term Assets: £70,000 Total Assets £150,000

Liabilities  Total Liabilities: £60,000   Shareholders' Equity Total Equity: £90,000 Total Liabilities and Shareholders' Equity: £150,000

 

1. Assets: These are resources controlled or owned by the business, with future economic benefits. Assets are categorized as current (cash, inventory, receivables) or long-term (property, plant, equipment). For an e-bike shop, current assets include cash in hand and e-bikes in inventory, while long-term assets may be the shop premises or specialized tools.
2. Liabilities: These are obligations the business must fulfill, such as debts and payables. Similar to assets, liabilities are divided into current (due within one year, like accounts payable or short-term loans) and long-term (like mortgages or long-term loans).
3. Shareholders' Equity: This represents the residual interest in the assets of the company after deducting liabilities. It includes funds contributed by shareholders and retained earnings. For a startup, this might initially be the investment made by the founders and investors.

• Liquidity Analysis: Assessing how easily the business can meet its short-term obligations. For instance, a high ratio of current assets to current liabilities indicates good liquidity.
• Solvency Analysis: Evaluating long-term financial stability by examining the ratio of long-term assets to long-term liabilities. A healthy ratio suggests the business can sustain its operations and growth.
• Investment Evaluation: Shareholders and potential investors examine the balance sheet to understand the company's asset composition, debt level, and equity status, informing investment decisions.

• A strong balance sheet with a higher proportion of assets to liabilities indicates financial health, enhancing creditworthiness and investment appeal.
• Conversely, a weak balance sheet with high liabilities signals potential financial distress, impacting the company's ability to obtain financing or attract investors.