If you just check out the tagline of the logo on this website you have probably worked out that I think the power of business is in the Balance Sheet. But why do I say that? What is so special about the Balance Sheet in particular.
If you’ve read my overview of the Financial Statements (and if you haven’t then I recommend that you do! – start here) then you will know that there are three components:
- Income Statement (Profit & Loss)
- Balance Sheet
- Cashflow Statement
The Income Statement and the Cashflow Statement are both very important. They tell you a lot about how your business is going. But here’s the thing. They only measure the performance of your business in the previous period – typically the last financial year. They are transient.
The Balance Sheet, on the other hand, captures the summary of all the decisions that you have made since your business started. It is continuous. You can run it any time (assuming your financial accounting package supports it) and it will give you the summary of everything you have done up to that point.
- Total Assets
- Total Liabilities
The specifics of the Balance Sheet are described in the post here that I wrote a little while ago. But within the Balance Sheet are the answers to a number of business questions that you might have:
- Can we cover our day to day costs?
- How well oiled are our business operations?
- What funding options do we have?
- Could our business assets bring us down?
When combined with the Income Statement and the Cashflow Statement we can also answer a number of other important business questions like:
- Is our business a going concern?
- How well is our business managed?
- Are we a good shareholder investment?
- What is our business worth?
And within the answer to those questions are a guide to the strategic options available to your business that I’ll talk about in a future post related to the 4R model.
With all of that the Balance Sheet becomes a critical thing to understand. Because of its continuous nature and that it stands alone as a measure of the entire history of your business, I really do believe that it is the power element of the Financial Statements. The power is in the Balance Sheet.
In other news I have been pulling together all my thinking in to a book that pulls all of this together. Its currently with the publishers but be sure to keep an eye out for it when it becomes available.