We all agree that reading a balance sheet is no mean feat, and can be tricky when you’re just starting out. Nevertheless, it’s an indispensable tool that summarizes your company’s financial situation at a given point in time. Don’t panic, here are a few keys to a quick reading of your tax return …
Balance sheet
The balance sheet is an accounting document that presents a company’s financial position at a specific point in time: the balance sheet date. It is made up of two parts. On the one hand,assets: what I own, classified from top to bottom, from the least liquid to the most liquid items. On the other, liabilities, which represent what I owe. These liabilities are arranged from top to bottom, from least to most due.
The balance sheet must be balanced, i.e. total assets must equal total liabilities.
Key balance sheet indicators :
The Solvency Ratio (shareholders’ equity/total assets) indicates your financial independence. Ideally, this should be at least 25%.
Working capital (the excess of your sustainable resources over your stable assets) is an important indicator of resilience. It should represent at least 20% of your accounts receivable + inventory.
Net Professional Assets (net fixed assets made up of intangible, tangible and financial fixed assets) is an accounting element which must also be reconciled with the actual state of your fixed assets and their market prices. Your tangible investments (investments in physical assets intended for long-term use by the company as means of production) must be anticipated. In particular, investments in renewal, due to wear and tear, or upgrading, due to regulatory requirements.
Cash flow (Working Capital – Working Capital Requirement) is the sinews of war! Your customer and supplier payment times are essential to understand and control. So are your inventory turnaround times and your operating cycle, with or without seasonal variations.
Income statement
This is the presentation of all your income and expenses for a given year. It is essential to think in terms of trends rather than absolute values over a single year, and to look at the key events that may have had an impact on your results.
The MIS (intermediate management balances) from the income statement will give you a direct reading of the essential ratios:
Sales reflects your level of activity.
Margin Margin: am I selling and buying at the right price?
Added value I want to know: do I control my external costs (rent, energy, supplies and maintenance, various fees, insurance, leases, etc.)?
Gross operating profit This is your indicator of profitability, and should enable you to pay yourself if your remuneration is not already included in personnel costs, and to meet your commitments (loan repayments, short-term financing costs, corporation tax, etc.).
Net income Net income: it’s up to you to find the balance between deducting a portion (private deductions, dividend distribution), reinvesting in your business, leaving a portion in reserve…
Cash flow (self-financing capacity): this ratio evaluates the resources generated by your operating cycle to ensure its self-financing. CAF indicates whether your company needs to call on external resources.
It’s a good idea to compare these indicators with industry standards available on the Internet, to see where your strengths and areas for improvement lie.
Your accountant and your banking partner remain at your side to support you throughout the life of your company.
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Le Connecteur means becoming part of a community of skilled professionals. It’s the ideal place to develop your skills, whether through meetings or through the sound advice of Le Connecteur ‘s specialists! Would you like to take a closer look at the basics of your accounting?
Alexia Fray – Professional finance analyst and financial analysis trainer, Crédit Agricole Pyrénées Gascogne.