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In accounting, the balance sheet is a table summarizing on one side all the means of production of a company and on the other all of the means of financing at its disposal.

Introduction

In Accounting, the Balance Sheet  is a financial document called summary report. This is a table summarizing all the  means of production equipment of one company and the other all type of financing at his disposal. A balance sheet account represents at a given moment T, the heritage of the company, that is to say :

What she owns, the asset :

In the financial lexicon, they are also called jobs . There are three types: permanent jobs (long held by the company), temporary jobs (held for less than 12 months) and resources destroyed (loss accumulation).

What it needs  the Liabilities  :

These are resources . There are permanent resources (which are left at the disposal of the company in a quasi-definitive way), the temporary resources and also the new resources generated by the company: the profits it realizes.

It will be noted that in 2002, new laws, published following the Boursier crack, appeared under the name of Sarbanes Oyley law, abbreviated SOX.

Interpretation of a balance sheet.

The working capital requirement (WCR)

The comparison between short-term assets and short-term liabilities gives rise to a fundamental fact: the Working Capital Requirement . The sum of the costs resulting from the activity of the company forms the cost price of the product or service. It is the receipt of the sales price that will cover both the cost price and the expected margin. However, the company must incur preliminary expenses before collecting its revenues. Indeed, if it has a commercial activity, it will have to build a stock of departure that it will have to pay to its suppliers before starting to sell it.
This indicator translates in numerical terms the impact of the time lag between incoming cash flows (cash inflows) and outgoing cash flows (disbursements)..

WCR =
Current assets – current liabilities = (inventories + trade receivables) – (trade payables + tax debts + social debts + other non-financial debts)

 

  • WCR is positive : our business generates inventory and we have trouble getting paid, our situation is unfavorable. We need to finance our needs in the short term either with its long-term surplus of resources or with additional short-term financial resources such as overdrafts.
  • WCR is zero : 
    the operating jobs of the company are equal to the operating resources. The company does not have a need for operations to finance, since current liabilities are sufficient to finance current assets, but it has no financial surplus.
  • WCR is negative : 
    we have no or little stock and our customers pay quickly. We are in a favorable case. We do not need to use surplus long-term resources (working capital) to finance short-term needs.

The Working Capital (WC)

Working capital is the surplus of permanent capital (equity) compared to long-term jobs (fixed assets). It is a resource made available to the company by its associates or created by it – even thanks to its activity, and intended to finance the investments and the need in working capital. Otherwise, the company will suffer cash flow problems.

Working Capital (WC) =
permanent capital – stable jobs

A largely positive working capital is not necessarily a good signal. It can reveal a deficit of investments whose effects will be felt on the activity in more or less long term.

The Net Treasury(NT)

Net Cash serves asAdjustment Variable : it is considered a surplus (or deficiency) of the Working Capital Fund on Working Capital Requirements. It can be positive or negative.

Net Cash (TN) = Working Capital (WC) – Working Capital Requirement (WCR)

Other financial ratios arising from the balance sheet

There are a multitude of financial ratios whose calculation is made possible through the operation of a balance sheet. Here are the main :

  • Debt ratio  = Debt / equity 
  • Debt Capability  = Equity – Financial Debt 
  • Duration of customer credit = (trade receivables – down payments received) x 360 / turnover including tax
  • Supplier credit term = (accounts payable – installments paid) x 360 / purchases tax included

Source

1 – C. Riveline (1980) – Evaluation des coûts : élément d’une théorie de gestion

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