Balance sheet ratios report

Directors probably place more emphasis on the profit and loss account than the numbers. However, it’s worth drawing their attention to what the balance sheet has to say about the company too, by using balance sheet ratios.

Balance sheet

In many companies, the financial management report provided for the board meeting will often consist of both summarised and very detailed profit and loss data, with this month’s actuals compared to prior years’ budgets and re-forecasts. Sales and cost ratios and variances will be calculated and trends and graphs analysed.

If any balance sheet data is produced, it’s often limited to the summarised balance sheet for the latest month and a debtor’s ageing report. But balance sheets are actually a much more important financial tool than is widely recognised and warrant more time and attention in board meetings than they are typically given.

However, the balance sheet gives a clearer picture of the company’s solvency. Provide the board with the current balance sheet and key Balance Sheet Ratios Report compared with the previous month and the last year-end date.

Explanations

When you introduce new balance sheet data into your reports offer to make a presentation to the directors so that you can be sure they understand what the information is saying to them. Thereafter add a foot note of explanation to your balance sheet ratios report.

For example you could use or add wording such as:

• current ratio: current asset/current liabilities
• quick ratio: current assets (excluding stock)/current liabilities
• defensive interval ratio (i.e. how long the company can continue paying its expenses without additional revenues or funding): net current assets/daily operational expenses
• gearing ratio: total debt/total equity.