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What Essentialities are Missing on Your Balance Sheet?
Every business competes hard in the industry to emerge as a winner amongst its competitors. For making this dream a reality, it is imperative that a business devises innovative strategies for getting a competitive edge. Now, here is something to think about! Every company can devise great strategies after putting a considerable amount of time and effort, but not every company is able to execute them.
Why? It is due to the fact that not every company is equal in terms of financial strength, which is needed to support the perfect execution of strategies. Moreover, most of the businesses are not aware of their current financial position, making them unaware of their capability of making decisions based on their finances.
The Role of a Balance Sheet
This is where a balance sheet comes into the picture. It lets business owners know about their present financial position in the form of a statement that typically includes current assets and liabilities, equipment, plant, property, owner’s equity, etc. In short, it lets business owners know about the net worth of their business. The balance sheet items provide you with a clear picture of your financial strength and help you make decisions based on the same.
But, there are some other essential items that are not included in the typical balance sheet but hold immense importance when it comes to gaining in-depth financial insights, knowing the overall business value, and making important decisions. Thinking as to what exactly are these metrics? Let’s dig deeper into the same!
9 Excluded Balance Sheet Essentials
1. Fair Assets’ Value
Most of the times, the balance sheet items are dependent on the cost itself. Although, assets that are appreciated should be adjusted upwards, but it is not the case! On the contrary, adjusted downwards are the assets that are declining below cost value. For instance, you purchased a 15-acre vineyard in a good location for $30,000 in 1990. If we go by the balance sheet, its value will be shown the same in 2020 as well, but if we take into consideration the fair value of this asset in the current times, it might be exceeding $150,000 as per its location. So, it is vital to keep in mind such factors when evaluating the value of an asset.
2. Assets’ Value
Intangible assets, or in other words, accumulated goodwill, are the assets that your company has earned over the years in the eyes of business partners and its customers. It includes your Yelp score, reputation, formulas, patents, and more. In case you are looking to sell your business, these intangibles will add to the overall value of your business. For instance, buying a normal URL can cost you around $100/year, but if you were looking forward to buying a renowned URL like Amazon.com, you would have to shell out a lot of money. This is due to the simple reason that the worthiness of Amazon’s URL is so high, as a result of its reputation in the market that you cannot buy the same as any other URL. However, a little intangible value remains if you have to sell your business as a result of a forced liquidation. This clearly means that if you have been doing good in the past and have maintained a good reputation amongst your customers and in the market, your intangible asset value is high, which you can cash upon.
3. Processes’ Value
The way you manage your processes has a lot of value in the market. For example, the way McDonald’s sells the same taste in any part of the world makes their process very valuable. These things account for a high cost for the new franchises, which is not clearly reflected in the balance sheet. Apart from this, the balance sheet also reflects accounting estimates that are essential for financial statements with respect to GAAP (Generally Accepted Accounting Principles) confirmation but do not equate to the value in the market at liquidation.
4. Depreciation Value
It is a clear estimation of the fixed assets’ wear and tear. It is directly proportional to how well you maintain the fixed assets, and if you happen to maintain them well, you might add to the value of the balance sheet. On the contrary, if you fail to manage the fixed assets efficiently, it could result in reducing the total value in the balance sheet.
5. Bad Debts’ Reserves
For the purpose of financial statement, the accounts of customers are written off that remain uncollectible during the specified periods as a reserve entry. These accounts can be seen as a collective amount that is lower or higher than the net adjusted value of the book. It is recommended to hire an expert for business valuation in order to determine the market value of the company’s items on the balance sheets or the ones excluded from it in a fair way.
Intangible assets that are purchased like a trademark or brand name usually have a limited life and value. Amortization is a forecasted adjustment which tells about the declining value of a specific asset every year. During the time of liquidation, the decreased market value of a particular asset can be entirely different from the cost, which is left after deducting the accumulated amortization.
7. LIFO Reserve
In order to adjust inflated inventory costs over a certain period of time, accounting adjustment is made which is known as LIFO reserve. When sold, accumulated LIFO adjustments may be more or less of its adjusted market value.
8. On-Hand Retail Inventory Value
The value of the inventory, which is ready for selling, is determined by its market cost. If the cost for producing 10 pairs of jeans is $120, they might sell in the market for $300 or even more. This means that accumulated inventory retail value could exceed the value stated in the market.
9. Team Value
The value of your team in terms of its experience and expertise might not be mentioned in the balance sheet, but it is clearly visible to any potential buyer. If you have a highly experienced and skilled team, your overall business value might just be more than you would have ever imagined!
In a nutshell, it is concluded that there are a lot of items that are not part of the traditional balance sheet but hold a great value in the market. They provide business owners with the actual picture of their financial position in the market. So, it is recommended to take into consideration their value at the time of checking a balance sheet and especially when looking to sell a business! Yes, these excluded items would add to your complexity of managing your balance sheet and overall accounting process, but it is more of a benefit for you.
In case, you lack the time or skills needed to manage this crucial task, along with other accounting chores, you may consider seeking accounting services. This way, you will not only be able to save time and effort in managing day-to-day accounting tasks but also use the same for enhancing business growth and scalability. Join hands with Cogneesol’s proficient accounting team, delivering accurate and timely back-office solutions to businesses worldwide for 13 years. Get in touch to start your 14-day free trial now!
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