The comparative balance sheet provides the information side-by-side about an organisation's liabilities, assets and Equity of shareholders at various times in time. It shows the changes and increases in various liabilities, assets and capital. A comparative balance sheet generally contains two columns of numbers that appear just to the right in the description. The first column includes the amount at a point in time or a particular moment, i.e. the current year. The next column has similar amounts from the previous year.
Did You Know?
An investor should also check non-financial information because it could greatly impact a company's return. This info includes the quality of the company's management, the state of the economy and the company's rivals.
Also Read: What Is the Common Size Balance Sheet? Explained with Example
How Do The Two Companies' Balance Sheets Compare?
The comparative balance sheet can comprise the three most crucial statements and other information that the company might wish to make public. The three most frequently used statements include:
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The income statement provides the business's operating and net income figures for different accounting years.
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The balance sheet is a company's financial statement at the closing of the accounting day, multiple times.
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Finally, the ‘statement of cash flows’ shows the cash flow and its sources (like operating, investment, etc.) for various accounting periods.
In some instances, the firms generally offer only the first two comparable statements, merely the Balance Sheets.
What Is a Comparative Balance Sheet?
Comparative balance sheet analysis analyses the trends of identical items, the calculated items, and groups of items on several balance sheet accounts of the same business company on different dates. The variations in the periodic balance sheet items reflect the actions of a company.
These changes are seen by checking the balance sheet beginning and after the period. These modifications can aid in developing an opinion regarding the performance of an organisation.
A comparative balance sheet contains two columns that contain the information of the original balance sheets. The third column is used to display the increase and decrease in figures. The fourth column could be added to provide the percentage of increases or decreases.
How Do You Prepare a Comparative Balance Sheet Analysis?
- The first step in completing an analysis of the comparative balance sheet is to arrange.
- Find the balance sheet of your company data and then set it in a table so that each account displays on a par.
- Present the data at regular intervals to ensure that it is consistent. It can be as easy as two snapshots taken every quarter, juxtaposed in the simplest form.
- It might be more beneficial to compare multiple pictures in other situations in time. A farm business that has distinct seasonal operations, for instance, could require you to look over twelve consecutive balance sheets each month to comprehend how the seasonality of the company affects the inventory of balance sheets, accounts payable and receivables.
- Then, look at how every account's value has fluctuated in the past.
Do you think that cash went up or down or remains the same? What happens to the accounts receivable, inventory, or account payable?
Continue to look at the balance sheet, observing how the various accounts interplay and alter as time passes. If, for instance, the company has an increase in the value of real estate assets, check whether you notice an increase in equity or debt capital? Do you have a fine guess on the company's strategy to finance real estate purchases?
Advanced Techniques for Complementing the Comparative Balance Sheet Analysis
To increase the accuracy of an analysis of your own to the next level, you could use additional strategies to make your comparison of the balance sheets more effective.
For instance, you could highlight every one of the balance account balances as a percent of the company's total assets. If you look at the changes in these numbers over time, you'll be able to observe how the balance sheet's composition is changing on a scale of common size.
Equity analysts can monitor the company's balance sheet by including this ratio in the comparative balance sheet analysis and ensure there's minimum risk of violating that restriction. Another method comprises other financial ratios related to balance sheets within the comparative analysis.
For instance, a bank could require a company to keep a minimum debt ratio to Equity. In incorporating this ratio into the comparative analysis, an equity analyst can examine the company's balance sheet to ensure there is no chance of exceeding that limit. The important thing to remember in each instance is to look at the data over time to discern and recognise patterns and changes.
Also Read: What are Consolidated Financial Statements?
What are the Comparative Balance Sheet’s Benefits and Drawbacks?
There are a variety of advantages/disadvantages of analysis of a comparative balance sheet. Analysis of comparative balance sheets can reveal patterns over time, which can help make decisions about the future of business. The conversion of information into percentages/ratios can eliminate some of the disparity in competitors' size and operating capabilities.
It enables individuals to make perfect choices. It will help understand the nature of the company's current operation and the shifts needed to improve productivity.
The stakeholder must be aware that past performance doesn't necessarily predict future performance. Pay attention to the possibility of economic influences influencing the analysis, like inflation or the onset of a recession.
Furthermore, the method by which an organisation reports its information within accounts could alter in time. For instance, the location and when transactions are recorded can change and not be apparent on the balance sheet. Also, just like a comparative balance sheet, you should write a business plan with other such formulas to achieve success while saving a lot of time.
A Good Example of a Comparative Balance Sheet Analysis
In this instance, we begin our comparative balance sheet study by looking at how each account has changed from the previous year to the following. In this instance, the business's cash flow has been growing quite a bit, and there's a sharp decline in inventory. The decrease in stock is more than the growth in cash, which increases the total assets.
The common-sized numbers provide further context for the shifts. The cash ratio has increased by 19% from the total assets to more than 73%, and inventory was at 12%.
Its account payables dipped dramatically, as did its side of liabilities, while other short-term debt decreased but to a less extent. Together, the accounts pushed total liabilities down as shareholders' equity rose from ₹75 to ₹130.
Without any statements of income and cash flows, and the capability to inquire about management, we aren't sure of the reason for these changes in the balance sheet. The company may be out of the business, be closing down its operations, or have violated a loan covenant and had to cut back on leverage rapidly. No matter what, the analysis of our comparative analysis showed significant changes throughout the balance sheet.
Conclusion
The business looking to properly manage costs, increase revenue, budget and make long-term spending decisions might want to use comparative balance sheet analysis as a guideline for the future direction of its operations.
If the company recognises the limitations of the information presented, the analysis of financial statements is an effective tool for predicting the growth of the company and its financial strength. If you want to automate every business process to save time, calculations come into consideration.
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