Balance Sheet

A balance sheet is a statement summarizing the assets and liabilities of a business at a particular point in time. This time is usually at the end of the financial year. The primary function of a balance sheet is to measure the financial solvency of a business as it indicates the extent to which the assets match the liability.

Elements Of The Balance Sheet

A balance sheet is made up of three aspects: capital, assets and liabilities. These three are related to one another as shown in the equation below:

Capital = assets – liability

Or

Assets = capital + liability

It is important to recognize that assets and liabilities are usually grouped according to their lifespan as follows:

• Short-term/current
• Medium-term
• Long-term

They have a strong impact on the results of the financial analyses of a business.

Balance Sheet Analysis

Balance sheets are used to establish the financial strength or weakness of the business concern. Furthermore, they are used to establish trends from historical information contained in the balance sheet.

Financial Ratio Analysis is used to gain an overall financial view of a farm business as well as indicate financial progress.

Financial ratios are classified according to the following:

• Solvency
• Liquidity
• Growth

Solvency: refers to the business’s ability to meet its long-term obligations if it does not go bankrupt.

Liquidity: measures the business’s ability to continuously generate sufficient cash to meet its financial commitments. A decrease in liquidity will render the farm business unable to meet its short-term requirements, continue operations and expand. A business’s cash in the bank is referred to as a liquid asset.

The growth: of a business or farming venture is measured by the change in the value of the business from one financial period to the next.

Assets: are economic resources that can provide potential services in the future. These are divided into non-concurrent assets that would include property, plant and equipment. In addition, there will be current assets, sometimes referred to as liquid assets, which includes the debtors and other receivables payments, bank balances and cash.

Short-term assets: current assets that management could convert to cash within the year (cash, receivables, stock)

Medium-term assets: intermediate assets that would take longer than a year, but shorter than five years to convert to cash. Includes investments that have a set time frame to them - policies or actual intellectual property (work that can be patented but takes time).

Long-term assets: fixed assets like machinery, land, buildings, motor vehicles, computers, furniture and fixtures.

Liabilities: are obligations that the owner must pay to other parties such as creditors, employees

Short term liabilities: current liabilities are amounts that must be paid within a year. - Salaries and wages, taxes, short-term loans, money owed to suppliers of goods and services.

Medium-term liabilities: are amounts owed on contract work carried out on research that does not have a specified time limit, but will be paid for when the project is complete.

Long-term liabilities:  these are debts that are due on long-term (more than one year) loans (mortgage) from the Land Bank. These are bank bonds on farmland and infrastructure, machinery and plants that are paid off over twenty years.

Owners’ equity: is the amount owed to the owner after the liabilities have been deducted. - For example, if the owner of a farm is worth R30 000 000 and owes the bank R20 000 000, you would subtract the amount owed on the farm from the owner’s capital worthiness. This renders the owners’ equity which would be R10 000 000. If the farm is a closed corporation, the amount owing to the members’ share after all amounts are deducted which is owed on the farm and other liabilities, is called the employees’ own.