how to improve balance sheet

Definition of balance sheet

The balance sheet shows the financial status of an organisation at a particular instant in time – normally at the end of a reporting period such as a financial year, half-year or quarter. It is essentially a snapshot of the organisation at a given date and reveals many important pieces of financial information for decision-makers.

Most importantly, it shows the assets or resource base of the company.

Given that a company is only able to access outside capital from two sources – debt (liabilities) or equity, it reveals how the company has decided to pay for its assets. When a company has borrowed money or promised to pay an outside party, a liability arises. Alternatively, a company may receive an investment of capital to help finance its operations and growth.

Assets (land, machinery, other fixed capital, intangibles, loan receivables) should be equal to (and thus balance out) liabilities (debt, reserves) plus shareholders' equity (also known as equity capital)

– in essence how the assets have been financed.

Concerns are sometimes expressed about the "size" of a company or bank's balance sheet, which will show both assets and debt issued or borrowed by the organisation. When analysts talk about the need to reduce the size of an entity's balance sheet they usually mean that the entity has to reduce the amount of debt. Equally, strengthening a balance sheet usually means the entity intends to increase the amount of equity.

It is possible to view balance sheets of listed companies by clicking on hyperlinks to that company's name on the FT's website, or by visiting the FT's markets data section

Balance sheet in the news

In May 2014 an FT report covered the decision by Deutsche Bank to tap investors in an €8bn capital raising. The move was seen as an about turn because the bank had previously said it intended to strengthen its balance sheet "organically" .

Source: lexicon.ft.com

Category: Forex

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