As important as the balance sheet is in evaluating a small business, you should consider other financial statements/documents in tandem with the balance sheet. As a whole, a balance sheets and financial statements provide the most extensive view of a business’s current viability.
Profit and Loss Statements
Profit and loss statements are an overview of how a business is doing over a period of time. A profit and loss statement is also referred to as an income statement. This statement shows the net earnings or losses, in other words, how profitable the business is.
Cash Flow Statements
Cash flow statements look at the money going in and out of business and can tell if the business is generating enough cash to pay expenses. The basic components of the cash flow statement are any short or long-term investments, financing (loans ), and operating costs (the discrepancy between whether the gap between expenses and income is growing).
Assessing a Small Business Using the Balance Sheet
Now you can see how vital the balance sheet is when considering the purchase of a small business. But don’t forget other factors as you assess a business’s viability.
Consider the history of the business, including longevity, location, and employees. What about the customer base and the prospect of attracting new customers? What is the outlook for this type of business and its current reputation in the community?
Use all the resources at hand, including the balance sheet, to make an informed and practical decision you can be confident in.