MSP Best Practice: How to Read a Balance Sheet

Discover   Written by Eve Zaidan on Nov 29, 2019    

Juggling multiple hats, anywhere from consulting to accounting, is not an uncommon scenario when you're just getting your business off the ground.

Time and time again, our clients remind us of how stressful being a start-up Managed Service Provider (MSP) can be, which is why we also understand how the accounting side can often feel overwhelming. 

Here, we provide your fast and simple guide for how to read a balance sheet: 

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Before We Get Started, What Is a Balance Sheet? 


There are three key financial statements that a company must supply on a regular basis: A profit-and-loss (P&L) statement, a balance sheet, and a cash flow statement. These three statements are interdependent. 

If you've read our previous blog, MSP Best Practice: How to Read a Profit and Loss Statement, we're sure you're familiar with what a profit and loss (P&L) statement entails. Now, it's time to run-through a balance sheet. 

A balance sheet, otherwise referred to as 'the statement of financial position,' is a report of all the assets, liabilities and equity a company possesses. This sheet provides the essential overview of just how well your management team makes use of its resources; what's owned, what's owing (which includes your balance and debts), and what's invested in your company (from its shareholders).

It's easy to think of a balance sheet as a snapshot of your company's financial standing, whereby 'assets' are the combined result of liabilities and equity. Here, it's important to note one of the most significant differences between a P&L statement and a balance sheet is the time period in which they're reported; a balance sheet reports on a specific date, whereas a P&L statement reports a time period (typically a fiscal quarter or year).

The Balance Sheet Terms You Need to Understand

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It's also important to note, that depending on the accounting software you use, the structure of your balance sheet may vary; there may be more or less detail. 

While we've mirrored the balance sheet format found within Xero, the following terms below, are universal within any accounting package, which we hope will assist you when making your way through your next balance sheet: 

1. Current Assets -


A balance sheet reports three types of assets, all of which, will be covered further below: Current, fixed, and non-current. 

Current Assets

A current asset is either a cash asset or any other asset that your company's able to convert into cash within 12 business months. The most common types of current assets include: Cash, inventory, and accounts receivable. 

Inventory

If a stockroom comes to mind when you hear the word 'Inventory', this would be for great reason. In the SaaS (Software as a Service) world, classifying stock isn't as straightforward as working in retail for example.

This is why inventory as a finance term doesn't simply refer to stock; it includes both raw materials and complete goods. Inventory refers to the goods that a company has in their possession for sale, along with the raw materials that are utilised to produce these goods. 

Prepayments

Within financial accounting, a prepayment refers to any payment made in order to settle a debt, bill, operating or non-operating expense prior to an account's due date.


2. Plus Bank -
 

Bank Accounts
As the title suggests, this is where you report all of the accounts that your company currently retains; investment accounts, revolving credit accounts, and business checking accounts.


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3. Plus Fixed Assets - 


Fixed Assets

An asset for resale will form part of inventory, a fixed asset however, is not for resale.

A fixed asset, alternatively known as a capital asset, is a physical property which your business makes use of in order to generate income; these fixed assets cannot be sold within a fiscal year, and are bound to depreciate. 

Common examples of fixed assets include: Computers, furniture, buildings, electronic hardware, and leasehold improvements (any enhancement of a leased space that is paid by your company). 


4. Plus Non-Current Assets - 


Non-Current Assets 

Any asset that your company's unable to determine the value of within the fiscal year, is classified as a non-current asset; you can think of these as long-term assets. 

Non-current assets typically include: Plant assets (land, vehicles, equipment etc.), intangible assets (trademarks, domain names, etc.), and other long-term investments.


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5. Less Current Liabilities - 

Current Liabilities 
These are your company's short-term financial commitments (debts), which must be settled within either a fiscal year or your company's standard cash conversion cycle. 


6. Less Non-Current Liabilities - 


Liabilities

Your company's liabilities will typically include the word 'payable' in the title, such as the 'Accounts Payable,' 'Salaries Payable', and 'Income Taxes Payable', all of which, will often have a credit balance.

These liabilities specify the exact amount/s owing to your company's creditors. 

Non-Current Liabilities

In the same way a non-current asset can't be valued within a fiscal year, non-current liabilities can't be settled within a year; they are your company's long-term financial obligations, which aren't due for payment until the next fiscal year or thereafter.


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7. Equity - 

Equity 

Like assets, there are also many types of equity. In general, equity can be thought of as ownership; it's commonly referred to as shareholder equity.

Shareholders' equity results when you subtract your total liabilities from your total assets; this leaves you with the value of the company you actually own - free from debts, loans and other charges.


8. Plus Net Profit -  


After you've added the net profit, you're left with the total equity, which is the final line of a balance sheet. 

We hope this glossary has helped you! For further tips and tricks, stay tuned for the next chapter on how to read a cash flow statement. In the meantime, discover Wise-Sync's 10-year success story en route to being named Australia's 12th fastest-growing IT solution provider (2019 CRN Fast50 Awards)!

Wise-Sync provides a streamlined and stress-free solution for integrating ConnectWise Manage or DattoAutotask PSA to Xero and QuickBooks Online. With Wise-Sync, long gone are the days of double entry, painful procurement and endless data errors because now, at just the click of a button - you can balance your books and revel in the greater financial visibility and improved cashflow that every MSP desires. Some call it “magic”, we call it Wise-Sync.

To find out more about how we can help you, speak to our friendly team today.