DEMYSTIFYING THE BALANCE SHEET - Understanding Tangible Assets
- Clayton John Ainger
- Mar 6, 2023
- 6 min read
Welcome to blog 2, in this sales training series on Demystifying Financial Statements.
If you are new to our blog - thank you for joining us – it’s great to have you here.
You can read previous blogs at our blog page: https://www.castcommercialacumentraining.blog/blog
A new training blog in this series is released every Monday, which includes a structured exercise to build your knowledge and embed your learning by incorporating it into your customer engagement planning.
Self-appreciation is the foundation of greatness.
As you read our blogs, please give yourself the gift of whats called an appreciative enquiry. Too many times when people embark on a quest of learning they focus on what they think they are doing wrong, or what they perceive is missing from their knowledge. I invite you to do something different.
We often underestimate what we already know, so please use this blog as an opportunity to build on your previous knowledge and existing expertise. Unless you are completely new to financial statements, or sales, you will recognise and already know some aspects of what I am going to share with you today. So, as you read this blog and our future blogs, kindly ask yourself:
What am I already doing well that I need to keep doing?
What am I beginning to do, that I need to do more of?
What am I not yet doing, that I need to start?
Lets get started...
This week we are going to learn the following:
Balance sheet fundamentals, and
How to read a balance sheet to start a business conversation
BALANCE SHEET FUNDAMENTALS
To be able to effectively analyse and hypothesise about the numbers shown in a balance sheet you first need to understand or refresh yourself about some basic fundamentals.
Firstly, what is a balance sheet? Simply put, a balance sheet is a wealth statement. It shows the wealth and investments in a business since it first started trading.
A balance sheet is divided into two halves. The top half, which shows the wealth and investments (‘assets’). The bottom half, which shows how the wealth is financed (‘liabilities and equity’) - see image 1.
What are assets?
Assets are divided into non-current assets (aka fixed assets) and current assets - see image 2.
Non-current assets
Non-current assets are long-term assets that are used in a business for more than 12 months. They represent the infrastructure of a business. The term non-current means more than 12 months.
There are two MAIN categories of non-current assets:
a. Tangible Assets e.g., computer equipment, plant, and machinery
b. Intangible Assets e.g., licences, patents, trademarks
A tangible asset has a physical presence, which means you can find it and touch it. An intangible asset has no physical presence, meaning you can’t find it, or touch it.
Current assets
These assets items are described as cash, or items that can be converted into cash in less than 12 months, e.g., inventory can be sold on a daily basis in exchange for cash. The term ‘current’ means short term or less than 12 months.
What are liabilities?
Liabilities are divided into current liabilities, non-current liabilities, and equity. They are always shown in the balance sheet in the order the liability must be paid – see image 3.
Current liabilities are short-term debts that needs to be paid in the next 12 months.
Non-current liabilities are long-term debts, due to be paid in more than 12 months.
Equity represents the total investment made by the owners (aka shareholders).
READING A BALANCE SHEET
TO START A BUSINESS CONVERSATION
You will recall from the first blog in this series that there are only four numbers you need to understand to help you prepare a ready-made business conversation. These are:
Tangible assets (often described as plant and equipment, or plant and machinery)
Inventory (aka stock if you are in the UK)
Accounts receivable (aka trade debtors, or trade receivables if you are in the UK), and
Cash
Today we are focusing on tangible assets.
Here’s how to do a quick and dirty review...for tangible assets.
The first time you do this, it may feel awkward, but it does become easier the more often you do it. Here are the steps to follow in order:
Step 1
Download the financial statements for one of your favourite customers. From the contents page, turn to the balance sheet.
Step 2
When you have a balance sheet in front of you on the right-hand side there are two or three columns with a date at top of each column e.g., 27 February 2021, a currency e.g., £ and denomination e.g., m = millions. The first column is always the current year information. The second and third columns is the information that relates to previous years - see image 4.
There is always another column headed ‘Notes’. These are references to more detailed information about the balance sheet numbers. For now, you can ignore this.
Step 3
The first number you are looking for is described as tangible assets or plant and equipment. Tangible assets represent the infrastructure of your customers business. These are the assets your customer needs and uses to run its business.
Once you have located tangible assets in the balance sheet, familiarise yourself with your customers business by asking yourself, what kind of long-term assets do my customers use and for what purpose e.g., office chairs, desks, computer servers, warehouses, forklift trucks etc. There will be different assets for different types, and sizes of business.
Step 4
To start your detailed quick and dirty (Q&D) review for tangible assets, use the first two columns on the right of the balance sheet, the current year (CY), and the previous year (PY). Once you identify these numbers answer the following four questions:
i. Compare CY with PY, then ask yourself, has the tangible assets number gone up, gone down, or stayed close to the same? Make a note of the movement.
ii. What can you hypothesize about the movement.
If it’s gone up, what could this mean e.g., growth, expansion, or diversification in the business.
Similarly, if the tangible assets number has gone down or stayed close to the same, what could the reasons be for this?
Are they scaling back, if so, why could this be? Are they seeking to stabilise the business, retaining cash for future investment, if so, why could this? During covid which crossed financial years 2020 and 2021 a lot of companies decided not to make new capital investments in their infrastructure. However, 2022 going into 2023, companies are starting to invest again.
Please note - You don’t need to have the exact answers, you just need to be curious about ‘why’ the movement could have happened, and brainstorm ideas to explore further.
iii. What questions could you ask your customer based upon your hypothesis and ideas to learn more about their business?
One of my favourite two-part questions is ‘how has your business changed in the past three years, and what are your plans for the next three years?’ This always gives me an opportunity to understand how the business has evolved, and its future strategic plans across a six year time period.
iv. Finally, based upon your hypothesis and questions, how could your products or services help your customer?
So, how long should this Q&D review take?
The first time you do a tangible assets review, it’s likely to be clunky, bumpy, and slow. Allow 20 minutes. With repetition, you will be able to do the review in just 5 minutes.
It’s now time to practice and play...
Repetition is mastery of all skill...so practice is key.
When we want to learn something new that involves a new mindset, or new skill, research suggests it takes 66 days to form new habits, new behaviours, and new ways of thinking. The first 22 days, we unlearn and literally unwire old thinking, old habits, old behaviours. The second 22 days, we start to create new neurological circuits in our brain as we rewire new habits, new behaviours, and new ways of thinking. The final 22 days is where we consolidate and hardwire our new normal. Hence, repetition leads to mastery.
Here's your homework
Download the financial statements for your top five favourite customers, who businesses you are familiar with. Then play and practice each of the above steps. Using your top five customers will mean you can apply the above steps to five different businesses. This will give you different perspectives, different questions to ask, new insights and fast track to mastery.
What's the next blog in the series?
Next week our training blog focuses on inventory and explores how your products or services could help your customer improve or optimise their inventory management system, signs to look out for and the questions to ask.
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