Balance sheet is an information report on enterprise’s financial standing as of the specific date. It refers to top five reports. In compliance with the international standards, it contains data on company’s assets and liabilities, equity and loan capital. On the basis of company’s balance sheet it is possible to estimate its financial standing, ratio of equity to loan funds. Unlike the “Profit and loss statement” that contains data on operating results on a cumulative total, the balance sheet reflects real facts on comprehensive state of business as of specific time.
For example, having good results for a current quarter, half a year or a year, an enterprise may find itself actually at the state of bankruptcy, if all its activity is based on loan fixed assets and materials using.
The structure of balance sheet lies in its name – balance is tranquility that is why it consists of two main sections always having equivalent sums. The asset indicates the estimated amount of company’s property, and the liability shows the sources for this property formation. Except for asset and liability, the report divides the data into current and capital assets. The first ones are used for less than a year, the second ones – for a longer time.
For instance, capital assets include buildings and long-term cash investments. Under current assets cash assets on accounts, cash desks, and raw materials are meant, and also those assets that can be quickly turned into money.
Balance sheet analysis
Balance sheet is the main reporting document. Its analytics is important for every company both for making inner managerial decisions and for other companies when estimating risks of a deal. Balance sheet analysis is conducted in several ways:
Horizontal and vertical method.
With the help of financial ratios.
Trend estimation procedure.
Factorial analytics of balance sheet.
Comparative analysis of balance sheet reporting.
Computer and online-programs for financial analytics.
1. Horizontal method
The horizontal analysis implies the comparison of balance ratios for various period of time. For example, they are compared with a previous year or results of the beginning and the end of accounting period. So, it is possible to detect the ratios dynamic pattern, having determined a positive and negative tendency. For analytics it is necessary to use any two and more periods of time, depending on the extent of required data. This may be a month, a quarter, half a year or five years. The horizontal analysis of balance sheet lets use values in monetary and percentage term.
2. Vertical analytics
The vertical accounting analysis bears the name of structured as well, because it reveals the structure in relative value. This type of investigation makes it possible to study modifications of separate articles for times. For example, a dynamic pattern of accounts receivable or credit debt in respect of previous years. For calculation there are interests to grand total of the report used. This method lets visually see current modifications, because it is not always convenient to read information in figures.
It is interesting! Horizontal and vertical analyses of balance sheet are often used together. They complement each other ideally providing with comprehensive information on company’s activity. For example, a horizontal one presents general materials on modifications for the current year in monetary terms, and a vertical one – more detailed data on several more important accounts in percentage terms.
3. Financial ratios analytics
For in-depth study of liquidity balance sheet is analyzed in relative terms. Ratios let not only estimate, but also forecast company’s financial solvency. For example, to determine the probability of timely or anticipated settlements with creditors, to calculate company’s solvency for a definite period or an average receivables turnover. One of the frequently used ratios is a marginal liquidity ratio that reflects balance sheet liquidity analysis and enterprise’s current financial sustainability as accurate as possible in comparison with other instruments.
4. Trend analysis
The main point of the procedure comes down to comparison of each line with a previous period similar to above mentioned methods. However the data themselves determine the direction of trend (down or up motion, to profit mark-up or to losses). On the basis of received information it is possible to predict future values as traders do, analyzing the stock or exchange market. To determine company’s management policy correctness or necessity in urgent change of its course. Trend estimation with minimal time period lets obtain more accurate figures, that is why in practice often indices within one year are considered.
The facts from foreign practice! In western practice a trend analysis of balance sheet data is combined with a horizontal one. Both methods are based on time spans, and intended to detect dynamic pattern. However by a horizontal analysis much attention is given to past figures and results of a trend one are better used by forecasting and planning.
5. Comparative method
Comparison of one enterprise’s figures with data of other companies of the same branch is called a comparative analytics. In foreign sources such analysis of company’s accounting is named industry analysis, what reflects its main point more accurate. For comparison absolute values are used. Also it is possible to conduct a comparative (industry) investigation, using indices of outside companies within a region, country or on international scale.
6. Factorial analysis
Under factorial method of investigation the study of different factors impact on operating result is meant. The more impact factors, the more these procedures of factorial analysis. The most common method is chain substitutions analysis. Essentially, when analyzing definite factors are removed one by one in succession, the obtained result is studied. So it is possible to plan priority areas of activity for desired values achievement.
Factors selection is carried out on the basis of practical knowledge and depends on every particular branch. It is considered that the more factors are taken into account, the more accurate the result is. However, you should take into consideration their interaction as equal, not distinguishing the main ones.
The factorial method is divided into single-stage and multi-stage. For more detailed picture the last mentioned variant is used, it lets analyze factors of not the same level of jurisdiction, but with their specification into composite elements. Also the factorial analytics can be divided into cross-sectional and dynamic analysis of enterprise’s balance sheet. The first presents the result for a definite date, the second – detailed information at runtime.
7. Software and online-programs
The results of balance sheet ratios let detect weak spots in company’s business, and elaborate a new urgent financial policy. On the basis of the same data outside companies, partners and prospective investors will be able to make a right decision on participation in joint projects.
The analysis of enterprise’s balance sheet is a complicated, multi-stage process, and as its results are extremely important, the best decision will be special programs using. Special-purpose software not only saves the time, but also extends the range of conducted investigations significantly. Except for balance sheet report estimation it is possible to make analytics of market reliability, to detect activity ratio, capital turnover ratio, financial stability score and so on.
There is an opportunity to make calculations by yourself with the help of special-purpose programs or online, relying on outside, independent experts. Birank.com service lets analyze balance sheet of any Russian company online quickly and accurately.
Birank.com service capabilities
Except for detailed estimation of company’s financial standing and balance analysis, Birank.com service lets fulfill complete checking of any legal entity or individual entrepreneur. You will get:
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