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A balance sheet analysis is a process in which an accountant or a business leader would study profits and expenses to determine ways to conduct business more efficiently. This person would look for things like wasted spending, sudden spikes in cost, sluggish sales, or possibly even the misuse of funds. While a profit and loss sheet normally has general summaries of each category, a balance sheet analysis is typically much more specific. Each and every transaction is carefully studied during this process, and the resulting information is used to make business decisions that would improve an aspect the company.
Usually, a balance sheet analysis begins with the gathering of corporate documents. Even though a ledger shows each business transaction with a description of the services rendered, most financial experts will want unrestricted access to invoices in order to have a clear picture of the overall business. Once these documents are gathered, it is then possible to understand why certain financial decisions were made.
This process is normally broken down into several separate steps. Items like sales, labor costs, inventory, and deposits are each reviewed individually in order to locate any discrepancies within the official ledger. When potential problems are located, the accountant would flag the entry for further review once the other entries are inspected. The next step would be to verify any discrepancies by physically locating the source of the problem. By conducting a balance sheet analysis in this manner, companies are often able to spot smaller issues before they become substantial problems.
The balance sheet analysis process is also used to compare previous fiscal dates in order to judge the company's overall productivity. For example, an accountant may notice that the business's shipping and delivery costs have risen well above the price of inflation. Once the company is armed with this information, the problem can be evaluated and corrected before serious losses occur. This is why a business sheet analysis is normally completed on a monthly basis.
Another use for a balance sheet analysis is when a company is being evaluated for investment purposes or loans. Banking institutions conduct this process to determine if a company has the financial assets to repay debt in an efficient manner. Many investors would also complete a similar process before buying stocks or considering any type of buyout. By gaining a more in-depth picture of a company's finances, many outside sources like tax agencies or charitable groups can estimate the net worth of a business as well.