As the fiscal year-end looms, accounting department in companies everywhere are busy compiling their annual reports. It’s been a tough year, and many companies are expected to fall short of their profit or budget target. However, it is the management’s responsibility to ensure that financial statements are complete, accurate and transparent.
After the General Motors bankruptcy in June, people talked about the rebirth of GM with a new, world-class balance sheet. But what does that really mean - what does a “world-class” balance sheet look like? In general the balance sheet of a company tells us its financial status at a given point of time – normally at the end of the month, quarter or fiscal year. Most business people are familiar with the balance sheet’s basic equation: the total asset amount is equal to the total liabilities plus equity. But the key point is what the balance sheet is telling us.
A world-class balance sheet is not limited to world-class companies. Successful companies with strong balance sheets reflect high-performaning employees who can maintain the competitiveness in the long run. The following are key attributes that determine a great balance sheet.
• Financially strong: The world-class balance sheet must reflect the excellent performance that successful financial results are based on. This includes strong operating profit, a positive cash flow and low liabilities. To understand the financial health of a company, the balance sheet can be analyzed, together with the profit-and-loss statement, using relevant financial ratios such as debt-to-equity ratio, return-on-investment ratio, inventory turnover, and so on. However, the correct analysis has to be based on the correct financial information.
• Unblemished by mis-statement: The balance sheet has to be compiled by a competent and knowledgeable accounting team with the support of an effective information system. It has to be complete, accurate and compiled within the designated period.
• Free from hidden losses: The balance sheet should be free of unclear or outstanding transactions such as long overdue accounts receivable, unsettled debts, slow-moving or obsolete inventories, and unused fixed assets.
• Transparent and reliable: Users of the balance sheet expect a true and reliable record on which they can base their analysis and decisions. Its transparency rests on an independent accounting team who can ensure that the information is not manipulated. Among other things, independent accountants guard against so called management adjustment, which can distort the true picture of the company’s financial status.
For the future, globally accepted accounting practices would enhance the integrity of accounting information even further and make world-class balance sheet a worldwide phenomenon.
By Yanyong Thammatucharee
Senior Vice President for Accounting and Finance at Central Marketing Group
email: yanyong.thammatucharee@gmail.com
THE NATION - DECEMBER 29, 2009
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