No BS 💩 Approach to Understand Your Balance Sheet

How to Become an Investment Jedi Like Warren Buffet 🧵👇

This section of the financial report shows us how healthy 💪 our business is.

It’s a list of Assets owned 🏎, Liabilities the company has in the future🪪💳, and a statement of Equity — i.e (and I’m oversimplifying this) what the business is worth 💰.

These figures all fit together in the equation:

Assets = Liabilities + Equity

We can interrogate the balance sheet to answer questions such as does our business have cash 💵 and for how long?

Are we able to pay our bills 😁 and our liabilities?

Are we in debt and possibly ☹️ not even realised?

In terms of Assets in our business, the more we hold the better as there are a number of finance facilities currently available to business in which the lender will secure a loan against these 🏣.

This is referred to as Asset Back Finance.

Typical examples of assets which we could raise finance against include:

Motor Vehicles 🏎

Property 🏣

Plant and machinery 🏗

Some other examples of other Assets include:

Stock or inventory — which if your company is in the business of selling products, this would be the value of unsold stock.

If you’re in the business of selling services 🤝, this stock amount would be referred to as WIP — Work in Progress — and similarly is the value of projects being worked on and not yet complete or billed

And then other assets that may appear on our balance sheet are licenses, trademarks or goodwill and debtors — i.e your customers which you have invoiced who have not yet paid.

And of course, the greatest asset of all — CASH!! 💰💰💰

Our balance sheet also lists our liabilities, which are debts the business owes and are due for payment in the future. 📉

The balance sheet will also show if any liabilities are due for payment past 1️⃣ year like say for example a loan.

This is why the liabilities on the balance sheet are split into current liabilities — amount due under 1️⃣ year, and long term liabilities falling due past 1️⃣ year.

Some examples of liabilities include:

Creditors or accounts payable — your suppliers due for payment who have offered you credit terms

Income tax, VAT and Employer Taxes 🧳

Credit card debt 💳

Mortgages and other long term debt 🏠

In terms of Equity, this shows how much profit the business had made in it’s lifetime, less any dividend or similar equity payments. 📈

I am simplifying this, but in essence it is a reflection of what the business is worth. 💰

It is the amount that would be left over if you sold off all your assets and paid off all your debts.

Therefore, if this figure is positive, then you know your business is doing a great job! 😆

Let me know in comments below how your business is performing or if you need further assistance understanding a set of accounts 👍

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