EOFY Reporting – How to Read a Balance Sheet

End of financial year came and passed – and now we have to finalise all the reporting. There are statements put together by our bookkeeper that we should verify before we hand it over to the accountant. But how can we verify when we don’t understand?

Let’s have a look at the most misunderstood statement – the balance sheet.

The balance sheet is supposed to show the financial position of a business at a certain point in time. All that we own and all that we owe with the balance between both being the value of the business – sounds easy. But why is the balance sheet the most underutilised statement in small businesses, especially hospitality? Because it is seldom right. And when it is right, then it is already a year old or more.

The monthly or quarterly accounting process in short comprises of 4 basic steps: collecting and verifying the source documents (your receipts and invoices), entering data (usually by accounting software), reconciling all accounts where the balance is known (e.g. bank accounts) and then preparing the monthly or quarterly statements.

Throughout this process there a few accounts that get neglected because they are not directly connected to the revenue and expenses of the period:

• Inventory – gets usually counted only once a year
• Property, Plant & Equipment – the depreciation factor will only be taken into account once a year
• Some Payable Accounts – don’t get verified because it is only money flow
• Equity – money flowing in and out from owners or shareholders will only be verified once a year

So what can we then read out of it?

The most important information you get out of your balance sheet is, if you have enough money to pay all your bills. That means as a restaurant owner you should pay attention to two of the areas on this business statement:

• Current Assets – this is the money that you have available on short notice. It includes cash, bank account balances and trade debtors (customers owing you money), and it includes as well all of your stock on hand.
• Current Liabilities – this is the money that you owe short term. It includes your credit card balances and all your payables, like suppliers (also called trade creditors or accounts payable), employees and tax debt.

So when you check your balance sheet, check the entries in these two areas and verify their values. After that you calculate if the current assets are exceeding the current liabilities – the ratio between them tells you:

ratio 2:1      >    your business is in a very healthy financial position

ratio 1:1      >    your business is just liquid enough to cover all your current debts and that is a warning flag