End of the Year 2016: Deconstructing the Balance Sheet
Except for countries like the UK, where the fiscal year is closed the 31st of March, at this time of the year, one of the first tasks in the agendas of financial departments and advisors is closing the financial year. And one of the documents they will have to generate will be the Balance Sheet of 2016.
This is an important document that provides a snapshot of a company’s assets, liabilities and owner’s equity.
However, there are some emotional aspects hidden behind accounting concepts and numbers, that I would like to emphasize. In order to discover them, we will use a process similar to deconstruction, term of philosophical origin that has become very popular thanks to modern cuisine, a cooking technique by which dinners recognize the dish through their taste, and not through their eyesight.
This way, we are going to undo the elements composing the conceptual structure and taste the essence of a Balance Sheet.
Some of the ingredients of the Balance that add harmony and flavour are trust and care.
Trust underlies the document and is also the effect pursued. The trust of shareholders, who accompany the evolution of the company, is behind the share capital and the reserves, as well as the differential trust of customers in our company, which must be reflected in the results. Both are part of the Owner’s Equity.
The scrupulous and daily respect concerning the obligations to financial and non-financial providers over time, is a key to building trust. And that trust is reflected in the Liabilities.
Then we have the other main ingredient: care when looking after our Assets, including both the ones that appear in our Balance Sheet and the ones that are left out of it, because of the accounting standards (for example, brand value, technical know-how, commercial contacts, collaborators…).
As executives, day after day we must build trust in our shareholders, providers, customers and employees, who take care of our company’s assets and develop our investments.
One of the greatest finance wises, Warren Buffet, said that “it takes 20 years to build a reputation and five minutes to ruin it. If you think about that, you’ll do things differently.”
Trust is what connects the different elements of the business. Their daily care, with facts and not only with words, must be one of the Manager’s main concerns.
Enjoy your balance sheets, taste the trust and care existing in your companies and draw your own lessons. This way, you will enrich your wealth of knowledge.