Balance Sheet Walk

Traditional balance sheet

Most financial statements reflect a balance sheet format consistent with the following formula:

EQUITY = (current assets - current liabilities) + (non-current assets - non-current liabilities).

The debt financing components of the traditional balance sheet are included in current liabilities and non-current liabilities.

Financial analysis balance sheet

Financial analysis demands a change in the balance sheet format by separating all funding components from operating components. The following balance sheet format needs to be considered:

EQUITY + DEBT = (current assets - current liabilities) + non-current assets.

In essence all funding is removed from the operating side of the equation. The net working capital is redefined by removing the cash on hand and at the bank and the bank overdraft from the right hand side of the equation. The same principal would apply to all forms of funding. This means that the end result would give rise to the following balance sheet format:

DEBT + EQUITY = WORKING CAPITAL + NON CURRENT ASSETS.

TOTAL CAPITAL EMPLOYED = TOTAL NET OPERATING ASSETS.

FINANCE = OPERATIONS.

The Financial analysis balance sheet reveals clearer information than the traditional balance sheet.