How to analyze the balance sheet accurately and simply in 2024
When receiving a financial report, analyzing the balance sheet is an important step for investors to accurately assess the business situation, capabilities and future potential of the enterprise. So how many ways are there to analyze the balance sheet ? And what should we keep in mind when analyzing? We invite businesses to join 1C Vietnam to learn through the information in the article below.
1. What is a balance sheet? Illustration
The balance sheet is a form of general financial report, generally showing the entire value of existing assets and the origin of those assets of a business at a certain time. The economic balance sheet is like a picture of the assets and capital situation of an organization at any time, helping investors know how much assets and capital the business has, and what they include?
For example: The economic balance sheet of company X (unit: million VND) is as follows:
Asset | First period | End of term | Capital | First period | End of term |
Total short-term assets | 16,347 | 16,981 | Liabilities must pay | 9,285 | 9,895 |
Cash and cash equivalents | 2,985 | 1,419 | Short-term debt | 8,868 | 9,366 |
Net value of short-term investment | 13,134 | 15,206 | Long-term liabilities | 417 | 529 |
Receivables | 70 | 199 | Equity | 7,141 | 7,150 |
Net inventory | 0.00 | 0.00 | Capital and reserves | 7,141 | 7,150 |
Other current assets | 157 | 155 | Other funds | 0.00 | 0.00 |
Total long-term assets | 80 | sixty four | Undistributed profits | 1,958 | 1,658 |
Long-term receivables | 0.00 | 0.00 | State budget capital and other funds | 0.00 | 0.00 |
Fixed assets | 16 | twelfth | Benefits of minority shareholders | 0.00 | 0.00 |
Net value of investment assets | 0.00 | 0.00 | |||
Long-term investment | 0.00 | 0.00 | |||
Commercial advantage | 0.00 | 0.00 |
In principle, total assets are always equal to the total capital of the enterprise (here it can be understood that the enterprise mobilizes capital and then uses capital to create assets to serve production and business activities) and therefore when The more the business scale expands, the balance sheet will also expand.
2. Balance sheet structure
To be able to analyze the balance sheet more easily, we must first understand the structure of the accounting balance sheet. Normally, this report will have 2 parts, including: Assets and Capital.
- Assets: Are resources controlled by an enterprise and can bring economic benefits in the future (according to VAS 01).
- Source of capital: Shows the origin of the asset, the source of capital can be from the investor's capital contribution or from borrowed capital (debts to be paid). From there, the concept of basic accounting balance relationships emerged, specifically:
TOTAL ASSETS = TOTAL CAPITAL
Details: Short-term assets + Long-term assets = Liabilities + Owner's equity
In the economic balance sheet, the relationship always applies to all types of businesses, all sizes, fields and industries, and even to each individual. Thus, the structure of an economic balance sheet is expressed according to the above equation. According to the regulations of the current accounting regime in our country, in the Balance Sheet, the Assets section will be arranged at the top and presented according to the decreasing liquidity of assets. Capital sources are arranged below, including liabilities (presented in increasing maturity) and owners' capital (presented in order of contributed capital).
3. 2 basic balance sheet analysis techniques
When conducting balance sheet analysis , investors often apply two important techniques: horizontal and vertical balance sheet analysis . Both of these methods help investors better understand the financial structure of the business, and detect important trends and changes within the organization.
3.1. Analyze the balance sheet horizontally
Horizontal balance sheet analysis involves the comparison of financial data over a specified period of time, usually over years. By looking at the changes in these amounts, horizontal analysis helps investors identify trends and potential strengths and weaknesses in the business's financial situation.
3.2. Analyze the balance sheet vertically
Vertical balance sheet analysis involves calculating the ratio of each item to a base number, usually total assets. Vertical analysis by expressing amounts as a percentage of total assets, makes it easy to compare financial statements over time and between different businesses.
4. How to analyze the balance sheet accurately and simply
4.1 Analyze capital structure
Analyzing the balance sheet according to capital structure aims to help businesses evaluate the allocation and use of capital, financial autonomy and capital use efficiency. Below are some popular analysis ratios, including:
- Ratio of loan capital/Total capital: The higher the ratio between these two items, the business will reduce its corporate income tax burden. However, high debt repayment pressure will affect the long-term development potential of the business.
- Ratio payable to seller/Total capital: This coefficient represents the capital used for production activities in the enterprise. The higher this ratio shows that the enterprise is promoting production.
4.2. Analyze asset structure
Asset structure analysis is to compare total assets at the beginning of the period and at the end of the period, then evaluate each type of asset based on its proportion. This analysis is often based on the following criteria:
- Cash and Total Assets Ratio: This ratio represents the level of liquidity of the business. The higher the index, the more cash the business has, the higher its liquidity and vice versa.
- Proportion of inventory and total assets: This index is considered the "liquidity level" of a business's goods. The higher the index, the higher the level of satisfaction of goods for consumers and vice versa.
- Proportion of Receivables and Total Assets: This index represents the level of capital appropriation of the enterprise, so this index should be balanced at a moderate level. If this index increases, the more capital occupied can cause the business to lack capital, and if this index is low, the business may lose customers.
- Proportion of fixed assets and Total Assets (Fixed Asset Investment Coefficient): The higher this index, the more fixed assets the enterprise has, proving good business performance, aiming for effective long-term development.
4.3. Liquidity analysis
In addition to business activities, investors also need to pay attention to the liquidity of businesses, especially those in the finance and credit sectors. Liquidity can affect the survival of a business. Common liquidity assessment criteria include:
- Short-term assets/Short-term debt: This index represents the ability to use short-term assets to pay short-term debt of the business. Therefore, this index is usually greater than or equal to 1. If this ratio is less than 1, the business needs to use provisions or long-term assets instead.
- Current assets, short-term investments - inventory/Short-term debt: This is a ratio that represents the ability to quickly meet short-term debts of the business.
- Cash and cash equivalents/Short-term debt: Represents the ability to pay short-term debt (almost immediately) of each business. However, if this ratio is too high, it shows that the enterprise has a lot of idle capital and is not using capital effectively. Therefore, investors often control and adjust this coefficient to be less than 1.
5. Effective financial and accounting management with 1C:Company Management software
For professional financial and accounting management, in addition to balance sheet analysis, businesses also need to apply modern management software, typically 1C:Company Management software. This is a comprehensive business management software, which stands out with financial management features:
- Ability to set up multiple types of cash funds and open multiple bank accounts at the same time
- Allows planning of revenues and expenditures in each stage and time to control the implementation of financial obligations.
- Create a payment schedule based on expected income and expenditure documents or on the basis of other cash flow plans of businesses.
- Allows recording, checking, reviewing and analyzing debts with suppliers and customers in detail and clearly for each debt object, contract, and order.
- There is a system to determine debt age, providing good support in controlling new and old debts and how long old debts have lasted.
- Track and monitor loans and debts and automatically calculate the principal and interest amounts that need to be paid in installments.
- Allows specific and detailed tracking of each credit and loan contract.
- Automatically calculate principal and interest payments for each loan contract in many ways (Fixed annuity, periodic interest payment, fixed principal payment, end-of-term interest payment, principal payment end of term,…)
- Support automatic payment of advances to employees.
- Integrate diverse types of electronic invoices.
- The software supports Vietnamese, has a simple interface, and is easy to use.
- Provides both On-premise and Online versions.
Above is general information about the concept, structure and ways to analyze the balance sheet accurately and effectively. Hopefully, through the above article of 1C Vietnam, it can help investors accurately assess the current situation of the business and make the right decisions. If you need to use 1C:Company Management software, please contact 1C Vietnam immediately.