The balance sheet is a snapshot of the company's financial position at a specific point in time. It shows only the picture as of two dates: on one side, December 31 of the previous year, and on the other side, December 31 of the year before that.
The balance sheet has two equal parts in monetary value. On one side are the company's assets, and on the other side are the sources of financing for those assets.
Assets are further divided into two categories:
First is **current assets**, which are intended for EXCHANGE: cash, goods for sale, prepayments to suppliers, rent paid in advance, short-term loans issued, etc. These are assets that can be converted into cash relatively quickly and are held for this purpose.
Following current assets is **non-current assets** (or fixed assets), which are intended for USE and generating income for the company (such as machinery, buildings, equipment).
It is very important that asset values are not overstated. Therefore, check whether the first part of assets does not include items like goods in stock that have already been sold long ago or loans that can never be repaid. Of course, the most accurate valuation of assets is based on inventories and audits.
The second part of the balance sheet — sources of financing — is listed as follows:
1. Liabilities with a maturity of less than 1 year
2. Liabilities with a maturity over 1 year
3. Equity (or owner’s capital), which includes owner investments into the company either as share capital or retained earnings (undistributed profit).
It is essential to remember the requirements related to equity and to review this figure carefully. What total do you see in the equity line? It should be at least half of the share capital but not less than 2,500 euros. Otherwise, you need to take measures to restore equity.
When applying for a loan, a bank will definitely look at how much of the company's activities are financed by loans and how much owners have invested themselves. Why? Because a bank wants to see whether the company can quickly cover liabilities with current assets and whether owners have contributed enough to ensure stability.
It’s also good to evaluate whether short-term liabilities (less than a year) can be quickly covered by current assets — you can find this information very quickly from your balance sheet after reading this post.
Before submitting your financial statement, it’s helpful to assess whether this snapshot truly reflects your company's situation or if it might be distorted. Even better is regularly analyzing your financial statements and keeping your finger on the pulse of your liquidity position because having money in your account or profit does not necessarily reflect your company's actual ability to pay its obligations in time — just like accumulated profit does not guarantee sustainability or liquidity. We will discuss this further in the next post.
