Managing By The Numbers: A Commonsense Guide To Understanding And Using Your Company's Financials

by Chuck Kremer

The balance sheet all by itself tells you some interesting and important facts about your company: • Is the business solvent—that is, are its assets at least equal to its liabilities? If the company were liquidated tomorrow, would the owners have anything to show for their effort? The balance sheet doesn’t give you an ironclad answer to this question, for reasons we’ll discuss below. But it gives you a rough indication of where you stand on this score. • Is the business sufficiently liquid—that is, does it have enough cash and other liquid assets to cover its short-term obligations? In other words, are you going to be able to pay your bills during the period of time immediately following the date on the balance sheet? • What do the company’s assets consist of? A balance sheet shows you how much money you have in cash or short-term investments. It shows you how much you have tied up in inventory, and in plant and equipment. It also shows you how much you’re owed by other people. • Who has a claim on those assets? A balance sheet doesn’t name names, of course. But it does show you how much you owe to various categories of creditors—vendors, lenders, the government, etc.—and how much belongs to the owners of the business.