We love balance sheets, don’t we? We pore over them, we analyse them, we turn them into ratios and assess the trends and we debate them in the eternal conflict between sales and credit.
But there’s one thing we often forget – they don’t tell us very much.
The curse of the balance sheet is that we think it tells us everything we need to know about the financial position but what it actually tells us about is the final position only one day in the year. We think that the other 364 days of the year are irrelevant – and, of course, that’s just not true.
There can be a whole lot of reasons why the balance sheet is not representative of the business. Chief amongst these is that the directors/owners of the business don’t want it to be. They want the balance sheet to show the company at it’s best, if they can arrange it. And with the help of the accountants, it’s certainly very possible to make it look better than it actually is.
So, my point is this; don’t ignore the balance sheet – it can be a source of useful information – but do treat it with a certain degree of contempt and keep in mind that it’s only a snapshot of what the business’ financial position was on that one day.
It’s what happens on the other days that you need to worry about!