Balance Sheet: A must for your company’s economic health
Balance Sheet management is the topic of attention, the importance can only be highlighted when marketing strategies are to be made or when a rigid data is a must for loaning entities. Industries must have solid information of its wealth. No company can achieve true knowledge of its profit and loss without getting proper financial statistics.
Balance Sheet is a profit and loss statement of a company. What assets do you own? What liabilities do you owe? And what are your equities from the market? It works on the formula (Assets = liabilities + equities) i.e. the funds owned by the company (assets) are either by borrowing from the market (liabilities) or gaining from profits or investors (equities). Whether small or big, there is an immediate requirement for the companies to maintain a balance sheet to calculate their finances. Many have faced severe financial crises and all thanks to an unrealistic balance sheet management.
There are almost multiple numbers of balance sheet software in the market but to choose among them is a wise thing to do and therefore do proper research before buying Gen BAL a most popular balance sheet preparation software.
Because knowing your companies revenue growth and margin is not enough. Here is the list of Ratios that will help to attain the knowledge of company’s profit and loss:
Quick Ratio: The indicator of a company’s short term assets liquidity, whether the company can meet its short term commitments with its assets. High quick ratio is a positive sign for the company. Higher the figures better is the position of the company in the market. The formula is Quick Ratio = (Current Assets – Inventories) / Current Liabilities. The ratio is commonly known as acid ratio as this is the quick test with immediate results.
Current ratio: The ratio is the indicator of a company’s liquidity. It calculates the amount of money in assets which is required to be converted in cash in order to pay the debts during that same year. One can take the figures out by dividing the total current assets by the total current liabilities. Current Assets can be the company’s cash, inventory, accounts receivable, or any other assets whereas current liabilities can be wages, accounts, taxes liabilities or installment for long term debt.
Debt to equity ratio: The ratio is a financial ratio determining the company’s ability to finance its growth. risk, gearing or leverage are other terms for this ratio. If the ratio is high that means the company is growing due to debt. Debt is not always a bad condition, it becomes a liability if one has to pay an excessive debt by taking loans and giving interest payments. In such a condition, to escape the debt one needs more amount of returns from the debt than the cost of the debt.
Interest coverage ratio: Specially introduced to judge the ability of the company to pay their interest expenses on outstanding debt. The ratio is derived by dividing earnings before interest and tax by company’s expenses for the same period. The ratio measures the margin of safety a company has for paying the interest during economically tough situations, basically the ability to survive in hardships.
Cash-on-cash ratio: A basic calculation of annual before-tax cash flow to the total amount of cash invested, displayed in percentage. It is generally helpful in computing the cash flow from the income-producing assets of the company. Cash-on-cash return is basically a check for the real estate sector as it reveals the cash income earned on the cash invested in the property. It is a predominant parameter to judge the ROI calculations.
Working Capital Ratio: It measures the company’s ability to pay off its liabilities with its assets. The difference between current assets and current liabilities can be negative or positive depending upon the kind of industry it is.
Apart from the above mentioned ratios, solvency, activity, turnovers, capital structure, liquidity, etc. are also there to help you find the company’s economic wellness.
Comparison is required for better results:
Comparing is a realistic approach. The company must compare its balance sheet to its successful counterparts to find out whether its roadmap is correct or not and what ration they need to work on.
Return on Capital Employed (ROCE) is to measure company’s efficiency of generating profit from its capital. Every company has its own measurements of ROCE. so one must choose wisely which company they want to compare their ROCE with.
Balance Sheet reveals the financial reality of a company. Even banks and investors look into the balance sheet of the company in order to decide whether the company is on the path of stability and generating profits.
Balance Sheet is a significant part of any companies overall working procedure and therefore must lookout such as Gen balance sheet software free download to check out the progress.
Hey, i am suresh Jacob and is a expirienced content writer and blogger for all the taxation related content and updates. Also i cover all the latest product and tax solutions from the SAG Infotech blogs with Gen GST, Income tax related compliance articles. You can follow me for all the updates now.