How Much is Your Company Worth?3:12 AM
Let us discuss about the features of finance in its various forms. Let us discuss about the three k...
Let us discuss about the features of finance in its various forms. Let us discuss about the three key financial documents that can help you know how much your company worth is. These are the building blocks that give a picture of the financial state of a company. This article focuses on how and why to know what your company is worth.
Knowing the proper value of your company may basically depend on the three documents that we will discuss in this article. This way you can nod your head to the correct places and determine the future of your company by making proper decisions based on it. Without the right finance in place, you risk missing out on growth opportunities or compromising on quality. We have some advice on how to manage this.
Also read: Start Up Financing and the Importance of your Business Plan
The Balance SheetThe balance sheet basically is a document that will give you clear idea on assets, debts, liabilities and other basic economic activities that your company is involved in.
Basically the balance sheet should show:
Assets are recorded in a balance sheet using their historical valuation. For example, if you bought a building in 1980, the balance sheet must record the original purchase price to determine its value. The building may be worth considerably more in real terms but that is the rule. Basically this is done to prevent having to constantly revalue the assets.
The equity value of the company is based on these two basic factors; assets and debts. The calculation of equity value can be made using the basic equation:
The Income Statement
The second of the most important documents that determines the worth of your company is the income statement.
The income statement consists of operating and non operating costs.
Operating expenses determines the operating profit of the company. The operating expenses include any non-operating revenues and expenses and are listed in the statement for this.
Non-operating profits are basically anything that is not connected to the day to day activities of the company. Business selling some real estate or buying some new buildings or equipment all fall under this category.
Revenues and expenses are listed in the income statement in the order of when they are received or spent. Sales and costs of items sold are all listed here to determine the profits. Then they are categorized as operating or non operating activities.
Some companies use forecasted accounting and may consider account sales agreed even if the money has not been received or spent yet. This is usually not recommended though commonly practiced.
After the proper evaluation of operating and non-operating expenses has been done the interests, taxes and amortization are deducted from it to reveal the net income.
Amortization is the accounting process used to calculate depreciation of intangible assets over time. Patents are the good examples of intangible assets.
After deduction of the taxes, interests and amortization the deduced amount shows the net income of the company. Shareholder distribution is made using this net income.
You use this deduced information as well as the operating costs of the income statement to determine whether your business is running effectively or not. You can determine the real outcomes of your business using the information available in the income statement.
Read: 5 Financial Mistakes Small Businesses Make
Cash Flow StatementUnlike the income statement which includes the profits and loss of the company that has not yet been realized as the forecasted accounting uses the information of account sales that has been agreed although the payments has not been done yet; the cash flow statement should show how much operating capital the company actually has.
As the name suggests, the cash flow statement includes the details of where the cash is being used maybe for expenses, operating costs or other uses. It also includes where the cash is coming from maybe via sales or profits or from any other ways.
This way you can actually determine from which areas the cash comes in and goes out of your company.
Why is it necessary to know what your company’s value is?It is always essential to keep an eye on the company’s financial statements. You may think the legal department is adding an excellent value but if in any case the company is strapped for cash you can get that extra benefit of not being required to hire that extra lawyer. On the other hand if you find things are looking perfect; you may consider hiring more and expanding your business to that extra new level.
If you can maintain maximum productivity within minimum costs you will definitely get advantages and getting to know how much your company is worth and keeping an eye regularly on these documents that determines it; can always come handy for your future business ideas and plans.