A balance
sheet is one element of a company's financial statement, along with
the statements of income, cash flow and shareholders' or owners'
equity. Sometimes described as a "financial snapshot," the balance
sheet is extremely fluid. Every time a company writes a purchase
order or takes in cash, the balance sheet changes.
But the balance sheet's contents can be significant. "Your
bankers and vendors want to know whether they should extend you more
credit. Your shareholders want to know whether you're squandering
their resources," says Michael McLean, a certified public accountant
in Oregon.
Frequent Updates
Balance sheets are also used to help a company continually
monitor its financial status. As a result, the sheets are generally
prepared quite frequently -- daily or every 10 or 30 days, according
to McLean.
Publicly held companies release balance sheets and other
financial results to shareholders quarterly. But balance sheets are
important to information technology departments, too.
"IT people need to understand how the decisions they make -- such
as build vs. buy or purchase vs. lease -- impact the overall
business strategy of the company. Being able to read the balance
sheet is part of that," says Jack Wilson, a professor of physics,
engineering science and IT at Rensselaer Polytechnic Institute in
Troy, N.Y.
"This is especially true in start-ups, where everybody has to
know about everything," Wilson adds.
"It's becoming an increasingly significant challenge for IT folks
-- whether they're in mainframes or networks or whatever -- to
comprehend the financial impact of their decisions for the current
year, as well as for future years," adds Craig Cauthen, an IT
financial manager at The Coca-Cola Co. in Atlanta.
Experts generally agree that when it comes to IT assets, the
balance sheet of a dot-com company tends to look quite different
from that of a traditional firm. By their very nature, dot-coms rely
heavily on IT infrastructures. But unless a dot-com has
well-established credit, it's likely to lease IT equipment, says
John A. Tyler, a CPA in Cambridge, Mass.
Also, unless IT equipment has been purchased under a lease-to-buy
agreement, the leasing fees will appear as liabilities. In contrast,
established companies that buy IT equipment can list it as an asset.
"Dot-coms are more virtual, in both time and space," Wilson
notes. They also tend to be valued more on the basis of ideas and
future earnings potential than on fixed assets like IT
infrastructures. In terms of the dot-com's assets, the percentage of
fixed assets tends to be low compared with the percentage of
intangible assets like patents and trademarks.
Some intangibles can't be included as assets because they can't
be assigned a monetary value, says Victor Petri, a principal at
PricewaterhouseCoopers in Boston.
As a rule, items like patents, trademarks and goodwill can be
listed as intangible assets if they have been bought, says Carol
Benintendi, a principal at Gold & Goldberg, an accounting firm
in Newton, Mass. Experts point to other items, including Web site
addresses and phone numbers, that can be intangible assets if
acquired.
Intellectual property such as internally developed software can
be listed on the balance sheet -- only upon completion of either a
working model or a "detailed program design" to demonstrate that it
really works, Benintendi says.
There is less agreement, though, on the relative importance of
the balance sheet to dot-com companies in comparison with
brick-and-mortar companies. Many dot-coms are privately held, so
there's no need to show the numbers publicly, Benintendi notes.
Sign of Good Sense
Some experts say a solid balance sheet can also indicate that a
company has good, sound business sense. "Start-ups need to do more
than just come up with a brilliant idea. They also have to be able
to manage and market that idea," Benintendi observes.
She says a key indicator of a good balance sheet is a strong
"current ratio," which is determined by dividing current assets by
current liabilities. "Liabilities are not necessarily bad, but they
should be counterbalanced by assets in some way," she says.
For example, due to hefty amounts of marketable securities, cash
on hand and intangible assets, Seattle-based Amazon.com Inc.'s
current ratio last year was 2.6-to-1, even though fixed assets
constituted just 4% of all its assets.
In comparison, Johnson & Johnson, the health care products
giant based in New Brunswick, N.J., is rich in fixed assets but
showed a current ratio last year of only 1.4-to-1. Experts say the
current ratio should be higher than 1-to-1 but note that a ratio of
4-to-1 is too high because it indicates that the company is holding
on to a large portion of resources that might be spent to grow the
business.
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