To get a good idea of what a business is actually worth you should look at a company’s balance sheet. Every 12 months a director will prepare a company’s balance sheet.
This 12 months is essentially a snapshot of what the business currently looks like. Balance sheets are usually produced at the end of the trading year or end of the tax year. A balance sheet is a statement of;
What a company owns – (minus) What a company owes
The difference can be described as the company’s net position. The question to be asked is how is the net position funded? The funded figure and the net position should be the same i.e. balance. It is important to remember that the net position, has been funded some how. For corporations this net position could come from a shareholders fund. The balance sheet balances because the company’s net position is equal to the amount of money the shareholders have put in + any company profits.
When you look at a company’s balance sheet they use a lot of jargon to explain the concepts previously outlined. Let’s look into these a little deeper.
What a company owns (Assets)
Assets are usually broken down into 2 parts.
1) Fixed – Tangible assets the company owns long term, which the company will keep for more than a year from the balance sheet date. This includes; land, property, furniture, machinery & vehicles.
2) Current – Intangible assets the company holds short term and which will be gone in a year’s time. This includes; cash, stock, raw materials, office supplies, receivables, what debtors owe, prepaid expenses and cash equivalents.
What a company owes (Liabilities)
Liabilities can be broken down into 2 parts.
1) Short term – Amounts due in less than one year. Overdraft is a short term creditor.
2) Long term – Amounts due in more than one year. A personal or business loan is a long term creditor.
Looking at the x 4 figures, the first two (fixed + current) minus the second two (short + long) should end up equalling the net position.
Funding is the way a company creates its net position. It breaks down into;
5) Share Capital – To build the business the company has probably sold shares to external shareholders.
6) Profits – Hopefully the company has been trading profitably and this contribute to the funding figure.