What Does a Balance Sheet and Profit and Loss Account (Statement) Say about Your Company

You do not do accounts with no effect or only for a revenue service. Accountancy deal with business assets, debts, receivables and business activities and it deducts from all the matters whether the company has grown rich or poor. It is a pretty well invented system of registration and moreover the only source of information on the company outside your mind.


Utilize Information from Financial Statements.

Why Is Accountancy Beneficial?

Through various statements, accountancy provides information on how the business actually works, where things are bought, how things are made, what is the origin of money (cash) and why the cash is spent. It gives background for staff remuneration. It retains information on company debtors and creditors. It is the evidence of business activities and whether these activities are profitable.


Assets and Debts

Business assets as a business term stand for a set of resources used for business. Each property belongs to somebody. Thanks to a balance sheet, you can recognize business assets both as to their composition (buildings, machinery, cars, information technology etc.) and as to their ownership (you use your own resources or outsourcing). The company wealth is not represented by the full value of its property, but it is what remains after deduction of debts from the property value. The actual wealth of the company accounts to the amount of equity.

The link between own resources and foreign resources is a core issue of financial structure optimizing. What ratio is the optimum one? The answer is not so simple. Foreign money is cheaper than the own money. Certain indebtedness is desired as it supports good profitability of the paid-in capital. On the other hand, growing debts reduce financial stability of the company. From the view of banks, such an indebted company is riskier and less favourable for crediting with a good interest.

The background for asset and financial stability of the company is the size of company property and the fact whether the company owns more long-term assets or current assets. The ratio between long-term assets and current assets is substantial for the profit creation and overall profitability. Maintaining of solvency is, however, also important. 

The balance rule says that long-term assets should be financed by long-term resources, and short-term assets by short-term resources. Compare the relation between the amount of long-term assets and the value of own resources and long-term resources of your company. You can find out the amount of long-term resources by a difference between foreign resources and short-term obligations and/or short-term financial assistances and loans.


What is Important in a Profit and Loss Account

As a balance sheet represents conditions, it itself allows describing only the current structure of company property and finances. State quantities are not enough for business management. If you want to find out more, you need to consult at least a profit and loss account which must coincide with the same period.

The profit and loss account tells you more about the company position, its prospects and chances, and also about problems because it contains costs and revenues. In accounting, costs are synonymous with growing poor whereas revenues are an accounting term for growing rich. Revenues and costs reflect business activity and they are monitored for each year separately.

The fundamental issues of the profit and loss account can be summarized in the following questions:

  1. Does the company achieve profits from its operating activities?
  2. Does the operating profit cover financial costs (i.e. bank charges, credit interests etc.)?
  3. Is the profit (or loss) in operating activities created by common business activities (and not by sale of stocks and property)?
  4. Is the added value (trade margin and manufacturing margin) positive?
  5. Does the added value cover personnel costs (is work productivity sufficient to form the value exceeding costs of materials, energies and services)?

If you can answer yes to the above-stated set of five questions, let me congratulate you. Your company is growing rich and it has good chances of maintaining its current position.