Passive balance as the basis for making managerial decisions

Before a company receives borrowed funds in any form, be it a loan from a financial institution or an individual's investment, its financial situation is carefully analyzed in order to determine whether it is able to meet on time with its obligations. Virtually all the information that is necessary to make the first conclusions can be obtained by analyzing the balance sheet. However, to begin with it is necessary to give its definition.

Passive balance is the total amount of sources of funds that are presented in the balance sheet. Passive has two main interpretations in the world practice, which are conditionally referred to as legal and economic. Passive balance in the first case is treated as a set of obligations of the enterprise with respect to persons who directly or indirectly provide him with their own funds (the share of owners in this case is treated as a liability in a conditional sense). In the second case, passive is treated as a collection of sources of funds. In addition, the liability is called the distribution plan for the estimated value of assets.

Thus, the liabilities of the balance sheet reflect the decisions of the enterprise to choose the sources of external and internal financing of investment decisions, the result of which are assets acquired by the enterprise. In accordance with this approach, three main sections of the balance sheet were formed.

The first section, entitled "own capital" contains information about the funds that were invested in the enterprise by its shareholders. This can occur in the form of investments in the statutory fund during the creation of the company, the repurchase of certain shares after the establishment of the company, as well as through retained earnings. Quite often, the profit received by the enterprise is not fully distributed among shareholders in the form of dividends, but is postponed for expansion of the company's activities - it is also considered a source of financing. A large share of equity is a good "safety cushion" for the company from possible financial risks.

In its second part, the balance sheet contains information on the long-term liabilities that the enterprise has to external entities. These kinds of lenders are not interested in the economic success of the enterprise, so they lend money, which must be given regardless of the company's profit. However, before obtaining a long-term loan, in the form of redemption of bonds, leasing, loans, etc., the company must prove that it can return it on time and with the interest negotiated in the contract. The longer the company has long-term obligations, the less is its chance to obtain a new loan.

Finally, the third section is short-term obligations, that is, obligations that must be paid off by the enterprise within a year. In general, they include commercial loans and those obligations that are suitable for the payment term in the current year. Analysis of the balance sheet in this case should be carried out in parallel with the analysis of its asset, since it is important for us to determine whether the enterprises are able to pay off their debts with the help of assets. For this, liquidity indicators are calculated. If these indicators are at a level lower than the level recommended by financial analysts, the enterprise can experience serious problems related to financing.

Thus, the balance sheet contains all the information that is necessary for analyzing the financial position of the enterprise and its financial prospects, so for an experienced financier, only a glance at it will suffice to read the enterprise as an open book.