How to read my balance sheet and master financial indicators

Your accountant has sent you your balance sheet. But with all the different accounting entries, it's hard for the uninitiated to find their way around. Often seen as a tool for "specialists", reading accounting documents can be frightening for many entrepreneurs, but they are essential.

Here are some key points to help you read, understand and interpret your balance sheet.

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The balance sheet, the key points

What is a balance sheet?

By definition, a balance sheet is a summary of a company's assets and liabilities at a given point in time. It is therefore a snapshot at a given point in time.

This financial document is one of the components of the annual accounts. It is drawn up at the end of the financial year and/or on the occasion of an interim balance sheet.

It consists of two parts reflecting the financial value of the company:

• assets, i.e. what the company owns,
• liabilities: what the company owes.

It is always balanced, i.e. total assets equal total liabilities.

The balance sheet is required by law for all companies operating under the "régime réel".

It provides a clear picture of your company's financial health and enables you to determine its solvency. It is a real tool to help you make strategic decisions.

What is the balance sheet made up of?

Presented in the form of a table, the balance sheet is read from top to bottom. Before reading each line in detail, it is important to bear in mind the different segments of the balance sheet.

There are two columns, with assets on the left and liabilities on the right. The assets side of the balance sheet includes fixed assets, corresponding to goods intended to last, and current assets, comprising inventories and work-in-progress, receivables, cash, etc.

On the liabilities side, you will find shareholders' equity, comprising share capital, reserves and profits, and current liabilities , comprising financial, tax, social security and supplier debts, etc.

Example - Reading notes

The sum of uses must always be equal to the sum of resources.
Profits represent a debt owed to the partners.

Financial ratios and indicators for managing your business

By reading the balance sheet, you can analyse the results using financial indicators to help you manage your business. Here we look at two important financial indicators: working capital requirements (WCR) and working capital (WC).

Working capital requirement: why calculate it?

The working capital requirement, or WCR, corresponds to the resources that the company needs to operate. It represents the cash shortfall arising from the company's current activity (operations).

The calculation method is as follows: WCR = current assets (inventories + trade receivables) - current liabilities (trade payables, tax and social security liabilities).

It is presented in days of sales: WCR/sales x 360

There are 3 possible scenarios:

• The WCR is positive : uses exceed resources. The company must finance its short-term requirements using its working capital or additional financial resources.
  
• The WCR is zero: uses equal resources. The company has no operating needs to finance, since its current liabilities are sufficient to finance its current assets.
  
• The WCR is negative: uses are less than resources. The business generates a positive cash flow. This is particularly the case for companies that pay their suppliers on time (30, 60, 90 days), have little stock and whose customers pay in cash. The company therefore does not need to use its working capital to finance any short-term requirements.

What is working capital used for?

Working capital (WC) is defined as the excess of stable capital (shareholders' equity + medium- and long-term borrowed capital) over permanent uses (fixed assets).

It is a sustainable resource made available to the company by its shareholders and financial partners, enabling it to finance working capital.

Cash flow is therefore the difference between WCR and WCR. If working capital is less than working capital requirements, cash flow is negative.

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Rely on the expertise of a professional

You now have all the information you need to understand and interpret your balance sheet.

Knowing how to read a balance sheet is important, but the most important thing is to be able to analyse it to make the right decisions.

Mathieu Chauveau, CEO de Ça Compte Pour Moi, l’expert-comptable en ligne.

You can draw up your company's balance sheet yourself, but this complex task requires a great deal of rigour. If you want to develop your business with peace of mind and ensure that your tax obligations are met, the support of a chartered accountant is highly recommended. A true guarantee, this professional is the business owner's privileged partner, providing support and advice from the start-up phase through to business management.

At Ça Compte Pour Moi, we support entrepreneurs at every stage in the life of their businesses. Our dedicated experts will give you an illustrated presentation of your accounts by videoconference and will be at your side every day.