Going Fundamental: Balance Sheet what?

source: http://live.regnumchristi.org

I know you might ask that to me. So I might as well dedicate a post regarding this document which usually fits in a piece of paper but has a very very important information about the company you might be thinking to invest in.

Balance Sheet is one of the set of Financial Statements I discussed in my previous post What are Financial Statements?

In order for us to fully understand the value of information we get in a Balance Sheet let me share with an equation called the Balance Sheet Equation:

Basically the above equation tells us about Balance Sheet. A Balance Sheet is a list of what the company owns, owes, and the net balance which it could claim as the real value that it owns.

It has 3 components:

ASSET are resources owned by a company and which have future economic value that can be measured and can be expressed in dollars. Examples include cash, investments, accounts receivable, inventory, supplies, land, buildings,equipment, and vehicles.

LIABILITY are obligations of a company or organization. Amounts owed to lenders and suppliers. Liabilities often have the word "payable" in the account title. Liabilities also include amounts received in advance for a future sale or for a future service to be performed

CAPITAL/EQUITY is the net amount invested by the owners or the amount that is attributable to the owners or in other words the owners' part in the whole company.

source: http://accountingquickbooksexperiences.blogspot.com/

Now why do we have to know these things about company?

One thing an investor needs to know using these information is the ability of the company to continue doing business which accountants term as "GOING CONCERN". No sane investor would put his or her money on a company that has no certainty of doing further business. If company has no capability to continue doing business it follows that its ability to generate income is already questionable.

Assets and Liabilities are further sub-divided to current and non-current(sometimes it is called long term). These sub-division allows us to compute ratios that will help us evaluate the company's ability to stay afloat in the short run(basically within a year) and its ability to further expand.


Some ratios derived from the Balance Sheet are the following:

Current Ratio is computed by dividing Current Assets by Current Liabilities. It indicates the capability of the company to pay currently maturing liabilities. 

Debt to Equity Ratio which is computed by dividing Liabilities by Equity indicates the leverage level of the company. A company with a high Debt-Equity Ratio is high risk because it shows that the company is more of owned by lenders rather than investors. It also post a risk of insolvency because the company is heavily indebted. 

Ways to be debt free: What now?

                                                       source: http://7million7years.com

Its been awhile since I wrote something about this topic. If you haven't read the first part click here.

In my last post we talked about accepting that you are in fact buried in debt. It may sound crazy or something but as any other form of addiction acknowledging your situation is the very first step. Now the next thing one should do is to make an inventory of whatever one has. 

When I say "whatever one has" that includes your assets and your liabilities.

Do you have a car? Do you have a house or a laptop? These things are your assets. Assets are things of value that you own. 

Do you have a credit card loan, a bank loan, a mortgage, or a "utang sa 5/6" ? These things are liabilities. Liabilities are things that you owe.

List these things separately. You could have a notebook with the pages equally divided of which the first half would be your ASSETS and the second your LIABILITIES. Make it a four column page. The first would be your description or name of the asset or liability, the second is the amount related to it, the third is your plan for it, ans the last is where you can either put a tick mark to indicate if the plan for it is done or a date of which you want to achieve such. See  sample below:

Now just like the above examples you have to decide which assets of yours can go away and which one are necessity. I know this would be gory but hey remember you are buried in debt and if you don't get out of it fast the more you will be buried in the pit. Oh these is one of the secrets ... you must get out of debt fast.

On your liability section determined which one are onerous or burdensome.

Lets define onerous, courtesy of wiktionary.org

Etymology

From Latin onerosus (“burdensome”), from onus (“load”).
Pronunciation

    * (UK) IPA: /ˈəʊn.ɜː(ɹ).ʌs/ SAMPA: /"@Un.3:(r).Vs/

Adjective

onerous (comparative more onerous, superlative most onerous)

   1. burdensome; difficult; wearing; tiring

Antonyms

    * gratuitous

Related terms

    * exonerate
    * exoneration
    * onus

Why list liability in the order of burdensomeness? 

As I have said awhile ago the faster you pay your debt the better. So the faster you pay debts or loans with hefty interest the better because you save money paying the interest attached to it. So looking back at the above I guess the Php 650,000.00 bank loan at 15% per annum should be settled or paid first to avoid paying interest.

Now looking at your assets, list them down in the order of greater fair value. Sorry I never told you. Maybe your laptop cost 25,000.00 when you bought it 3 months ago but if you are to sell it  now probably you will only get 10,000.00 to 15,000.00. One has to consider an asset's fair value. 

Wikipedia has this to say about fair value:

A rational and unbiased estimate of the potential market price of a good, service, or asset, taking into account such objective factors as:

    * acquisition/production/distribution costs, replacement
      costs, or costs of close substitutes
    * actual utility at a given level of development of social
      productive capability
    * supply vs. demand

and subjective factors such as

    * risk characteristics
    * cost of and return on capital
    * individually perceived utility

What does this mean? Your assets may have a lower or higher value depending on how much is the accepted fair value at the time of sale. So what can you do to be able to sell your stuff to pay off your debts? I guess these are my only advice in regards to this matter ; first make sure people who are interested to buy see value in your asset and second make sure such are in good shape.

Looking at the two sides you might notice that you have a difference of negative Php 197,500.00

This is what we call Net Worth. To read about my post regarding Net Worth click here.

Having a negative net worth signifies that you are really buried in debt while having a break even or a positive net worth means you are able to leverage your assets and liability to the full potential. 

So what is one of the things that you should do to be debt free? 

You have to list your asset in the order of greater fair value and liabilities in the order of onerousness. Pay first your onerous debts and make sure your assets has greater value so that you can get as much from it.

Ways to be debt free: What now?

                                                       source: http://7million7years.com

Its been awhile since I wrote something about this topic. If you haven't read the first part click here.

In my last post we talked about accepting that you are in fact buried in debt. It may sound crazy or something but as any other form of addiction acknowledging your situation is the very first step. Now the next thing one should do is to make an inventory of whatever one has. 

When I say "whatever one has" that includes your assets and your liabilities.

Do you have a car? Do you have a house or a laptop? These things are your assets. Assets are things of value that you own. 

Do you have a credit card loan, a bank loan, a mortgage, or a "utang sa 5/6" ? These things are liabilities. Liabilities are things that you owe.

List these things separately. You could have a notebook with the pages equally divided of which the first half would be your ASSETS and the second your LIABILITIES. Make it a four column page. The first would be your description or name of the asset or liability, the second is the amount related to it, the third is your plan for it, ans the last is where you can either put a tick mark to indicate if the plan for it is done or a date of which you want to achieve such. See  sample below:

Now just like the above examples you have to decide which assets of yours can go away and which one are necessity. I know this would be gory but hey remember you are buried in debt and if you don't get out of it fast the more you will be buried in the pit. Oh these is one of the secrets ... you must get out of debt fast.

On your liability section determined which one are onerous or burdensome.

Lets define onerous, courtesy of wiktionary.org

Etymology

From Latin onerosus (“burdensome”), from onus (“load”).
Pronunciation

    * (UK) IPA: /ˈəʊn.ɜː(ɹ).ʌs/ SAMPA: /"@Un.3:(r).Vs/

Adjective

onerous (comparative more onerous, superlative most onerous)

   1. burdensome; difficult; wearing; tiring

Antonyms

    * gratuitous

Related terms

    * exonerate
    * exoneration
    * onus

Why list liability in the order of burdensomeness? 

As I have said awhile ago the faster you pay your debt the better. So the faster you pay debts or loans with hefty interest the better because you save money paying the interest attached to it. So looking back at the above I guess the Php 650,000.00 bank loan at 15% per annum should be settled or paid first to avoid paying interest.

Now looking at your assets, list them down in the order of greater fair value. Sorry I never told you. Maybe your laptop cost 25,000.00 when you bought it 3 months ago but if you are to sell it  now probably you will only get 10,000.00 to 15,000.00. One has to consider an asset's fair value. 

Wikipedia has this to say about fair value:

A rational and unbiased estimate of the potential market price of a good, service, or asset, taking into account such objective factors as:

    * acquisition/production/distribution costs, replacement
      costs, or costs of close substitutes
    * actual utility at a given level of development of social
      productive capability
    * supply vs. demand

and subjective factors such as

    * risk characteristics
    * cost of and return on capital
    * individually perceived utility

What does this mean? Your assets may have a lower or higher value depending on how much is the accepted fair value at the time of sale. So what can you do to be able to sell your stuff to pay off your debts? I guess these are my only advice in regards to this matter ; first make sure people who are interested to buy see value in your asset and second make sure such are in good shape.

Looking at the two sides you might notice that you have a difference of negative Php 197,500.00

This is what we call Net Worth. To read about my post regarding Net Worth click here.

Having a negative net worth signifies that you are really buried in debt while having a break even or a positive net worth means you are able to leverage your assets and liability to the full potential. 

So what is one of the things that you should do to be debt free? 

You have to list your asset in the order of greater fair value and liabilities in the order of onerousness. Pay first your onerous debts and make sure your assets has greater value so that you can get as much from it.