{"id":830,"date":"2022-04-11T14:31:04","date_gmt":"2022-04-11T18:31:04","guid":{"rendered":"https:\/\/murphybusiness.com\/blog\/?p=830"},"modified":"2025-07-08T11:55:54","modified_gmt":"2025-07-08T15:55:54","slug":"understanding-a-balance-sheet","status":"publish","type":"post","link":"https:\/\/murphybusiness.com\/blog\/understanding-a-balance-sheet\/","title":{"rendered":"Understanding a Balance Sheet"},"content":{"rendered":"

\"BalanceWhether you\u2019re running a successful business or interested in buying one, it\u2019s important to understand the various financial documents that a company produces. These reports help you know what\u2019s going well, what\u2019s going poorly, and whether the company has a healthy long-term outlook.<\/p>\n

The balance sheet is a report that helps you look at the big picture of the company. You can see the assets, liabilities, and owner\u2019s equity. These are generally prepared once a quarter or once a year and represent the business\u2019s current financial position.<\/p>\n

Here\u2019s what you need to know about each balance sheet category:<\/p>\n

Looking at Assets<\/h2>\n

The first part of the report will tell you what resources the business has. This can help you value the company and know exactly what you\u2019re buying<\/u><\/a>. Or, if you\u2019re an owner, it can give you a good idea of how strong your company is.<\/p>\n

You don\u2019t want to look at just the amount of assets but also how high-quality they are. That means, how likely are you to be able to turn that asset into the appropriate amount of cash? Of course, cash on hand is the highest value, and aging account receivables have far less value.<\/p>\n

Pay attention to the age and quality of the inventory and how close major assets are to the end of their useful lives. The net value of an item is its initial value minus depreciation, so that\u2019s an important number to note.<\/p>\n

Understanding Liabilities<\/h2>\n

Next, you\u2019ll look at liabilities. These are debts that the business owes to others. You might see accounts payable to specific vendors, loans from the bank, or other liabilities. When you\u2019re buying a business, you may choose to buy only the assets, but the seller may also require you to cover the short-term liabilities like accounts payable.<\/p>\n

Any liability that\u2019s due in 12 months or less is a short-term liability. Long-term liabilities include long-term loans, bonds the company issued, or other long-term debt.<\/p>\n

Owner\u2019s Equity (Book Value)<\/h2>\n

The amount left over after you subtract the liabilities from the assets is the owner\u2019s equity, or book value, of the company. This is what belongs to the business owners. Some of the items in this category include invested capital, retained earnings, and the amount of equity drawn out of the company to pay owners.<\/p>\n

Theoretically, the book value is what you would get if you liquidate the company rather than sell it. It\u2019s a good bottom-line number so that you know how much you could get back if everything goes poorly.<\/p>\n

As a business owner, it\u2019s essential to trim your expenses and keep your book value high. Of course, there might be periods of higher costs, but those should be temporary. Use the balance sheet to understand where you can cut costs and improve your business situation.<\/p>\n

Your Balance Sheet Reflects Financial Health<\/h2>\n

Now that you understand the three parts of the balance sheet, you can see how it reflects the business\u2019s financial health. A company with low cash, older assets, and high liabilities is in a dangerous position.<\/p>\n

On the other hand, having substantial cash reserves, newer assets, and low liabilities makes your company more attractive to buyers.<\/p>\n

If you\u2019re interested in buying or selling a company, don\u2019t go it alone. There are too many ways you can leave money on the table. Instead, let us help you get the deal that works best for you. Contact us today<\/u><\/a> for more information!<\/p>\n","protected":false},"excerpt":{"rendered":"

Whether you\u2019re running a successful business or interested in buying one, it\u2019s important to understand the various financial documents that a company produces. These reports help you know what\u2019s going well, what\u2019s going poorly, and whether the company has a healthy long-term outlook. The balance sheet is a report that helps you look at the … Continue reading “Understanding a Balance Sheet”<\/span><\/a><\/p>\n","protected":false},"author":1,"featured_media":937,"comment_status":"closed","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[31,30],"tags":[69,70,64],"class_list":["post-830","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-brokerage-services","category-small-business","tag-balance-sheet","tag-business-operations","tag-business-planning"],"yoast_head":"\nUnderstanding a Balance Sheet -<\/title>\n<meta name=\"description\" content=\"Understanding a Balance Sheet Brokerage Services The balance sheet is a report that helps you look at the big picture of the company. You can see the assets, liabilities, and owner\u2019s equity. These are generally prepared once a quarter or once a year and represent the business\u2019s current financial position. 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