Key Performance Indicators You Should Monitor When Analyzing a Balance Sheet

Introduction

A balanced scorecard is a useful tool when it comes to analyzing a company’s performance. It’s typically used to measure and assess a company’s financial performance and strategic alignment. A key part of the balanced scorecard is measuring and monitoring company-wide performance indicators, such as those found on a balance sheet. By doing this, businesses can accurately track their financial history, identify problems, and set goals for improvement and growth.

Analyzing a balance sheet is an important step for assessing a company’s financial performance. Looking at a balance sheet provides key information about a company’s assets and liabilities, and also helps them to identify potential growth opportunities or financial risks. When analyzing a balance sheet, there are several performance indicators that should be monitored. In this blog post, we’ll discuss some key performance indicators you should keep an eye on when analyzing a balance sheet.

Current Assets

Current assets are important for evaluating a balance sheet. They include cash, investments, and accounts receivables, and can help paint a picture of the liquidity of an organization. Monitoring these numbers can give good insight into the overall financial health of the organization.

Cash

Cash refers to physical currency or any currency that can be quickly converted into cash. For example, a company or individual’s checking or savings accounts would fall under this category. In evaluating a balance sheet, it is important to look at the amount of cash on hand. This is a key indicator of liquidity and the ability of an organization to pay its current debts. It can also be an indication of how quickly funds can be used for investments or other strategic opportunities.

Investments

Investments can also be an important source of liquidity for an organization. These can encompass a wide range of assets, from stocks and bonds, to derivative securities and commodities. Monitoring the value of investments over time can provide insight into the liquidity of an organization. It can also indicate what kind of risks the organization is taking in terms of investments, and whether or not it is diversifying its portfolio.

Accounts Receivables

Accounts receivables are cash that is owed to an organization by customers, suppliers, or other entities. Monitoring these figures is important in order to better understand the cash flow of an organization. Knowing how quickly accounts receivables are paid can be a good indicator of the overall health of an organization, as well as the quality of its credit management.

Fixed Assets

Fixed assets are long-term tangible assets owned by a company, such as buildings, machines, and furniture. They are important to consider when analyzing a balance sheet, as they provide indicators of a company's financial standing, such as its ability to pay long-term debts or to raise additional capital when needed. Here are some key performance indicators you should monitor when analyzing a balance sheet related to fixed assets.

Property and Equipment

The most common type of fixed asset is property and equipment. When analyzing a balance sheet related to these assets, it's important to consider the following key performance indicators:

• Valuation: When evaluating the value of property and equipment on the balance sheet, it's important to make sure that assets are accurately valued. Overvalued assets can lead to inflated profits, while undervalued assets can result in losses.
• Depreciation: All assets lose value over time as they age and become obsolete. It's important to factor in depreciation when evaluating the value of an asset on the balance sheet.
• Maintenance: Properly maintaining and repairing assets is essential to ensure that they remain in top condition and can be used for a prolonged period of time. Monitoring expenses related to maintenance and repair can provide insight into the overall condition of a company's assets.

Intangible Assets

In addition to property and equipment, intangible assets, such as customer relationships, brand recognition, and intellectual property, should also be considered when analyzing a balance sheet. Key performance indicators associated with intangible assets include:

• Goodwill: Goodwill expresses the amount that a company is worth due to its brand value, customer base, and other intangibles. When evaluating the value of a company's intangible assets, it's important to track the amount of goodwill held on the balance sheet.
• Growth Potential: Intangible assets generally have potential for growth, providing valuable insight into a company's future prospects. It's important to consider the potential for growth when evaluating a company's intangible assets.
• Transferability: Intangible assets can be transferred to other companies, making them more valuable than tangible assets. Monitoring the transferability of intangible assets on the balance sheet can provide information about the overall health of a company's assets.

Liabilities

Liabilities are debts or obligations of a business, typically categorized as either short-term or long-term obligations. When evaluating a balance sheet, it is important to understand the implications of the different types of liabilities and their impact on the company’s overall financial health.

Short Term Debt

Short-term debt, also known as current liabilities, includes loans, accounts payable, income tax payable, wages and salaries, dividends, and other obligations due within one year or less. Analyzing short-term debt should involve an examination of the debts the company has taken on, the payment terms, and their impact on the company’s cash flow. Additionally, understanding how debt levels compare to a company's liquidity will help you to determine how well the company is managing its short-term liabilities.

Long Term Debt

Long-term debt, also known as non-current liabilities, consists of loans and other debt obligations from outside lenders and other creditors due in more than one year. Checking the amount of long-term debt a company holds is necessary for a complete assessment of its financial health, as too much can put the company at risk of defaulting on its obligations. Additionally, looking at the company’s long-term debt in comparison to its assets and other sources of capital can help to provide a better idea of the company’s overall financial strength.

In summary, it is important to keep an eye on both short-term and long-term liabilities when analyzing a balance sheet. Monitoring the levels of debt and the terms of repayment can provide key insights into the company’s financial health and its future prospects.

Equity

When analyzing a balance sheet, it is important to monitor both the level of total equity and its two primary components - paid-in capital and retained earnings.

Paid-in Capital

Paid-in capital, also referred to as share capital, is the total capital invested in the company by shareholders. This is the sum of funds that an owner has committed to the business, and increases with new investments, such as the sale of new shares.

Retained Earnings

Retained earnings refer to a company’s accumulated profits after subtracting dividends paid throughout the company’s life. As a result of this, retained earnings are a useful metric for measuring a company’s success over time. It is also important to monitor any changes in retained earnings over short periods of time, as this can be a sign of either significant growth, or operational difficulties.

Interpreting Balance Sheet Analysis

When monitoring the performance of a company, it is important to analyze its balance sheet along with key performance indicators. This evaluation provides insight into a business’s financial position, but it is also essential to monitor these indicators to understand the stability, liquidity, solvency, and profitability of the organization. Here are a few performance indicators that are important to consider when reviewing the balance sheet.

Monitor Liquidity Ratios

Liquidity ratios measure a company’s ability to pay its current debts with its current assets. Examples of liquidity ratios are the current ratio, quick ratio, and cash ratio. It is important to take into account the demands of the company’s operating cycle as different industries have different liquidity requirements. For instance, a seasonal business may need more liquidity in peak months compared to other periods.

Analyze Solvency

Solvency measures the amount of debt a business owes compared to its total assets. It is important to monitor these ratios over time as changes in them demonstrate how solvent the company is and its ability to cover its long-term liability. Examples of solvency ratios include the debt-to-asset ratio, debt-to-equity ratio, and interest coverage ratio.

Evaluate Profitability

Profitability ratios are useful to identify a company’s ability to effectively generate income. It is important to take into consideration the industry standards when analyzing these ratios as different businesses may have different benchmarks for profitability. Examples of profitability ratios are the return on assets, gross profit margin, and net profit margin.

Conclusion

Financial analysis through balance sheet analysis and the monitoring of key performance indicators is important for the success of any business. While there are numerous categories of KPIs that are useful to measure the health of a business, understanding the main categories and subcategories can help businesses track their progress and plan for future success. By tracking main health indicators like liquidity, profitability, efficiency and solvency, and then diving into more details with solvency ratios, cash flow ratios and efficiency ratios, companies can get a better sense of the strength of their balance sheet. This can then be used for budgeting and forecasting, as well as for identifying potential areas for improvement.

Balanced scorecards are becoming increasingly popular as a tool for measuring performance, and many companies are now using the main KPIs mentioned in this article to benchmark their performance. By monitoring trends in these KPIs and benchmarking against industry averages, companies can benefit from an improved picture of their overall financial health. This, in turn, can lead to increased profits and improved business performance.