Whilst accountants know how to prepare a BALANCE SHEETā¦ 95% donāt know how to read them.
Interpreting balance sheets is the HARD bit.
So, here are the first 3 things I look for when reading a balance sheet.
Pull up a chair.
Let's go! š
When I review a balance sheet, I need a detailed picture of how the business is funded.
Iāll build out a picture under 3 headings;
1. Capital Structure
2. Working Capital Profile
3. Liquidity Headroom
Let's tackle them each in turn
1. Capital Structure.
The capital structure tells you how a business is funded / owned.
Is the business funded by debt or equity? What is the mix?
Who are the investors and what are their motives? And what are the rights and obligations attached to each?
Take each debt or equity instrument in the balance sheet and get clear on the following:
Who owns it?
How much have they put in?
What are they owed today?
What does their return look like if things go well
What are their rights if things donāt go well?
When does it mature?
I visualize this in a table.
I put the most senior ranking debt at the bottom.
Yes, this is upside down to the way you may have seen this presented before.
What can I say, I'm a rebel š