Page 68 - Finance for Non-Financial Managers

Siciliano03.qxd 2/8/2003 6:36 AM Page 49
The Balance Sheet
This is usually a good clue that you might not want to buy their
stock just yet, as they may not yet have figured out how to
make money in their business. (This was a story heard fre- 49
quently in recent years in the aftermath of the dot-com collapse
of 2000-2001.)
Using This Report Effectively
The balance sheet is the status report of the company’s finan-
cial health. It shows where the company is strong, such as good
cash balances and low amounts of debt, and it shows where the
company is weak, such as large amounts of debt classified as
“current,” minimal retained earnings, etc.
Often the answers it provides are your cue to ask the ques-
tion “Why?” It is a good idea to be familiar enough with the bal-
ance sheet to be able to know which questions to ask.
Pay particular attention to the ratios and analysis tools that
we’ll discuss in Chapters 7 and 9 for some excellent ways to get
more information in less time when looking at a balance sheet.

Manager’s Checklist for Chapter 3
❏ The balance sheet is the report of the company’s financial
condition at a certain moment. It will provide valuable
information about the success of the company’s cash
management practices, its history of profitability, and the
adequacy of its invested capital. Often the most valuable
information it provides is simply showing the right ques-
tions to ask.
❏ Current assets and current liabilities are closely related.
Current assets are very liquid and should be able to be
converted into cash within a 12-month period. Current lia-
bilities, in turn, must be repaid with that same 12-month
period, usually from the cash raised out of the conversion
of current assets. The difference between the two is called
net working capital.