Your Balance Sheet is an integral part of reporting for your business. But sometimes it's not clear what it all means.
Balance Sheets are made up of Assets (things you own) and Liabilities (things you owe) and Equity, which is the difference between the two.
Assets are a measure of your company's size and scale, so it's important you know exactly how much yours are worth.
What are Short Term Assets?
Your short term assets are those things that can quickly and easily be converted to cash, such as Accounts receivable, shares and stock, as well as the actual cash in your bank account.
If you are going to look for funding from a bank, they will look at the ratios of your assets and liabilities, especially short to long term.
What are Long Term Assets?
Long Term Assets are the things that you own that will last for a number of years and are those things that may take longer to sell, such as Land and Buildings.
Many businesses have computers, vehicles and office furniture and these are also classified as long term assets, even though the life span might only be 3 years and you may be able to sell it easily. These are more commonly known as Fixed Assets and are "written down" over a period of time via depreciation. Your accountant will generally prepare a depreciation report, and this will show the written down value (the cost of the item after depreciation claims), as an estimate of the market value of your assets. However, this is not generally what you can sell these assets for.
Depreciation used to be a rough indication of the life of an item (ie if a desk is to last for 10 years then it would be claimed over a 10 year period of time), however with the tax rules showing that you can currently (2021/2022) claim any asset cost as a part of the business, it has made it hard for us accountants to show the true asset worth on your Balance Sheet.
Short Term Liabilities
Short term liabilities (debts) are things like creditors (bills to pay) and the ATO, superannuation and employee entitlements (such as holiday pay). They are generally due to be paid out within the next 12 months (often within the next 3 months) and are compared to the short term assets as a way to determine whether your business is solvent (able to pay it's bills on time).
Long Term Liabilities
Long term liabilities include loans and other borrowings that are not due for payment or payout for more than 12 months. These borrowings are generally paid in smaller instalments and will impact any lending decisions that a bank might make.
Generally, a long term liability will be matched with the purchase of a long term asset, and if the lender links them, it might be known as a secured debt, or a mortgage.
The Current Ratio
One ratio that is good to review the liquidity of a business (how well it can pay its debts) is the current ratio.
Take your total current assets, and divide them by the total current liabilities. If this number is more than 1, then your current ratio is a healthy number. If it is less than 1, you have more bills to pay than cash and may be experiencing some cash flow difficulties.
Understanding your Balance Sheet and how it reads to a potential buyer or a lender can help you to understand your business better and make better decisions.