Do you know how your company's financial health is doing? Get to know the balance sheet and see how it can help your financial management!
Without a clear view of their assets, obligations, and equity, many organizations end up running into financial difficulties. That is why a company that wants to ensure its sustainability and growth needs to prepare a balance sheet.
This accounting tool is indispensable for understanding the real financial situation of the business. With it, you can assess the viability of new investments, optimize resources, and even ensure compliance with tax obligations.
But do you know exactly what a balance sheet is and how to use it? In this article, we will explore these and other points, with tips and a step-by-step guide to implementing it in your management!
What is a balance sheet?
The balance sheet is an accounting report that presents a company's financial position at a given point in time. It provides a detailed overview of the organization's assets, rights, and obligations, and follows the basic principle of accounting:
In other words, the balance sheet shows where the company's resources come from and how they are used. This allows managers, investors, and other stakeholders to plan the business more efficiently and, consequently, make more strategic decisions.
How important is the balance sheet for the company?
The balance sheet provides a detailed view of the business. However, its importance goes far beyond keeping up with accounting obligations and financial compliance. Check out the main results this tool can generate!
Financial health analysis
With a clear view of the business's financial health, the balance sheet makes it possible to answer questions that are key to the company's success:
1. Does the company have more assets than liabilities?
2. Is cash flow sufficient to cover short- and long-term obligations?
3. Is the level of debt sustainable?
Questions like these help direct preventive actions to avoid financial crises and keep the company stable.
Strategic planning
The information extracted from the report makes it easier to define financial and operational strategies. The company can better allocate resources for investments and identify areas that need cost cutting.
With slow-moving inventory, for example, the balance sheet makes it possible to create strategies to sell idle products and balance cash flow. It also facilitates expansion, merger, and acquisition plans, since it reduces risk.
Attracting investment and credit
Banks, investors, and other financial institutions often analyze the balance sheet to assess a company's credibility and ability to pay. This directly influences:
- Approval of loans and financing with better terms;
- Interest from investors looking for financially healthy companies;
- More advantageous negotiations with suppliers and partners.
Comparison with competitors and benchmarking
Analyzing the balance sheet also allows the company to compare itself with competitors in the industry. It helps build a more competitive position and adopt strategies based on the industry's best practices.
To that end, it makes it possible to identify efficiency in resource management compared to similar companies, profitability and liquidity standards in the market, and opportunities to improve the financial structure.
Compliance with tax and regulatory obligations
Companies, especially mid-sized and large ones, are required by law to present periodic financial statements. Keeping the balance sheet up to date is essential to avoid tax problems and maintain a good reputation in the market.
In this sense, the report ensures compliance with legislation, reduces the risk of fines, and provides transparency in reporting to regulatory bodies.
The balance sheet and Brazilian legislation
In Brazil, the preparation and presentation of the balance sheet must follow a series of legal and accounting standards. Here are some relevant points of Brazilian legislation on the subject.
Corporations Law (Law 6,404/76)
This is the main legislation governing corporations in Brazil. Law 6,404/76 requires companies to present annual balance sheets, which must be approved at a shareholders' meeting and registered with the Board of Trade.
Brazilian Accounting Standards (NBC)
The NBCs, issued by the Federal Accounting Council (CFC), are a set of rules and guidelines that regulate accounting practice in Brazil. They follow international accounting principles (IFRS) to ensure that financial statements, including the balance sheet, are consistent and comparable.
Accounting Pronouncements Committee (CPC)
The CPC is responsible for issuing technical pronouncements that regulate accounting in Brazil and ensure that Brazilian accounting procedures are aligned with international standards. CPC 26 deals specifically with financial statements, including the balance sheet.
Taxes and the balance sheet
Brazilian tax legislation also requires the balance sheet to be adjusted to correctly reflect tax obligations, such as taxes payable and recoverable. The report must be used to calculate a series of tax indicators, such as taxable income, and can be audited by the Federal Revenue Service in case of suspected tax irregularities.
Disclosure and transparency obligations
Publicly traded companies, whose shares are traded on the stock exchange, must follow strict transparency requirements. The balance sheet, like the other financial statements, must be audited by independent firms and disclosed publicly, usually on a quarterly basis.
Balance sheet structure: assets, liabilities, and equity
The balance sheet is divided into three major categories: assets, liabilities, and equity.
These represent everything the company owns or is entitled to receive. They are divided into:
- Current assets, which are highly liquid resources (cash, bank accounts, accounts receivable, and inventory);
- Non-current assets, which are long-term holdings (real estate, equipment, and investments).
These are the company's financial obligations, classified as:
1- Current liabilities, which are short-term debts and obligations (suppliers, wages, and taxes payable);
2- Non-current liabilities, which are long-term commitments (loans and financing).
This represents the difference between assets and liabilities, corresponding to the company's own capital.
A practical example of balance sheet analysis
To make it easier to understand, let's look at a simplified example of a balance sheet:
1- Current assets: 100,000
2- Non-current assets: 200,000
3- Total assets: 300,000
4- Current liabilities: 80,000
5- Non-current liabilities: 50,000
6- Total liabilities: 130,000
7- Equity: 170,000
In this example, the company has positive equity, indicating good financial health.
Common mistakes when preparing a balance sheet
Preparing a balance sheet requires care and attention to detail. Some mistakes are common, especially for beginners, and can undermine the accuracy of financial information.
Incorrect classification of assets and liabilities
A very common mistake is incorrectly classifying assets or liabilities as current or non-current. This can affect the analysis of the company's liquidity, since current assets are usually converted into cash within a year, while non-current ones are long term.
Not considering intangible assets
Failing to record intangible assets such as trademarks, patents, or goodwill can affect the company's valuation. These assets have value that must be taken into account, which is why it is essential to compile all of the company's data.
Not properly updating asset and liability values
Failing to update asset values to correctly reflect depreciation or amortization can lead to overstated or understated equity. This makes it difficult to accurately assess the company's financial health.
Ignoring the real value of equity
Equity is an essential indicator that shows the company's value after obligations are deducted. Errors in this calculation can distort the view of the company's worth.
Lack of reconciliation with tax and accounting documents
Failing to reconcile balance sheet entries with the company's other accounting and tax documents, such as the general journal and the general ledger, can create discrepancies in the numbers. This compromises the reliability of the information.
Errors in classifying contingent liabilities
Failing to properly record contingent liabilities — that is, obligations that may or may not materialize depending on a future event — can create an inaccurate view of the company's debt. This affects solvency analysis and financial planning.
Step by step: how to prepare a balance sheet
Besides avoiding common mistakes, there are some important steps to creating a balance sheet. Here is a step-by-step guide to preparing it correctly.
1- Organize the documentation
Gather all the necessary financial documents, such as bank statements, accounts payable and receivable reports, inventory records, and accounting records.
2- List all assets
Identify and record all of the company's assets and rights. Separate current assets (short term) from non-current assets (long term) and include amounts for accounts receivable, inventory, investments, and fixed assets.
3- List the liabilities
List all financial obligations. Categorize them as current liabilities (short term) and non-current liabilities (long term), and don't forget to include operating expenses, loans, and taxes payable.
4- Calculate equity
To calculate equity, apply the formula:
This amount represents the company's own resources after subtracting debts. Positive equity indicates good financial health.
5- Review and adjust the figures
Check that all accounts are correctly classified and that the figures reflect the company's reality. Corrections may be necessary to ensure an accurate balance sheet.
6- Generate detailed reports
In addition to the balance sheet, prepare complementary financial reports, such as the income statement, to get a broader view of the company's health.
7- Analyze the results
Assess the company's financial structure and check for balance between assets and liabilities, healthy debt levels, and sufficient capital for future operations. Compare the results with previous periods to detect financial trends.
Best practices for analyzing the balance sheet
The step-by-step guide will already help you prepare your balance sheet, but there are a few more tips for keeping the process transparent and accurate. To ensure the report is useful for decision-making, follow the best practices below!
1- Monitor it periodically
It is not enough to prepare the balance sheet once a year. Perform periodic analyses (quarterly or semiannually) to detect problems and opportunities early. This will make it easier when creating the final report.
2- Compare different periods
Track the evolution of the balance sheet over time to identify growth patterns or recurring difficulties. Analyzing previous periods helps you understand the company's financial trajectory.
3- Use financial indicators
It is important to choose effective metrics to build the balance sheet. Some of them are:
- Current ratio — assesses whether the company has enough assets to cover short-term liabilities;
- Debt ratio — measures the proportion of debt relative to equity;
- Profitability — shows the return obtained from the company's assets;
- Inventory turnover — indicates efficiency in selling products.
4- Automate accounting management with a financial management system
ERP software helps automate analyses and generate accurate reports. It is a way to reduce errors, save time, and ensure greater accounting precision. Systems such as the Useall ERP help organize financial data, facilitating detailed analyses and reducing operational errors.
The balance sheet is an essential tool for the financial management of any company. With a clear diagnosis of the business's health, the report makes strategic decision-making easier, but it is essential that it be prepared properly.
Follow the step-by-step guide and best practices we outlined to succeed in this task. To further optimize your financial management, get to know the Useall ERP and automate your financial processes with more security and agility!
Originally published in Portuguese at useall.com.br.