The 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 to 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 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 overall financial view of a farm business as well as indicating financial progress.

Financial ratios are classified according to the following:

• Solvency
• Liquidity
• Growth

Definition:

Solvency

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

Liquidity

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.

Growth

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

Assets

Are economic resources that can provide potential service 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- these 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.

Click here to view a video that explains a balance sheet.

Click here to view a video that explains how to complete a balance sheet to buy land or a farm.