The balance sheet answers what the P&L can’t: can this company take a hit? Four quick questions get you most of the value.
One: is cash plus receivables comfortably above short-term payables? Two: are receivables growing faster than sales — a collection problem hiding as growth? Three: what’s sitting in inventory, and would you buy it today? Four: any balances nobody can explain?
Five minutes, once a month. If a number surprises you, that’s the report doing its job.
Start at the bottom, not the top
Most people read a balance sheet downwards and lose interest around fixed assets. Read it in the order the questions actually matter.
First: can this business pay what is due in the next year? Compare current assets to current liabilities. If current assets are smaller, the business is relying on something not yet on the page — a facility, an owner, or optimism.
Second: how much of the business is actually owned? Look at equity against total assets. A company with SAR 8 million of assets and SAR 1 million of equity is being funded by other people, and those people have terms.
The three numbers that tell you most
The current ratio — current assets over current liabilities. Above 1.2 is usually comfortable; below 1.0 needs an explanation.
The quick ratio — the same, but excluding inventory, because inventory is only cash if someone buys it. For a trading company the gap between the two ratios tells you how much of your comfort is sitting on shelves.
Receivable days — receivables divided by revenue, times 365. If your terms are thirty days and this reads seventy, you are financing your customers for forty days and probably do not have that priced in.
What to be suspicious of
A receivables balance that grows faster than revenue. That is not sales growth, it is collection slippage, and it ends in a bad-debt write-off.
An inventory balance that grows while revenue is flat. Something is not selling and nobody has said so yet.
A "director's account" or "related party" balance moving in both directions with no documentation. Auditors ask about it, banks ask about it, and buyers discount for it.
Accruals that never change. A provision that sits at exactly the same number for three years is not a provision, it is a plug.
The two questions to ask your accountant
"When was each of these balances last reconciled to something external?" A bank balance ties to a statement. Receivables tie to a customer ledger. If a number ties only to itself, it has not been verified.
"What is in other receivables?" It is the most common hiding place on a Saudi SME balance sheet — staff advances, deposits, prepayments and a few things nobody knew how to classify.
The five-minute version
Current assets against current liabilities. Equity against total assets. Receivable days against your stated terms. Then ask when the three largest balances were last reconciled.
That is enough to know whether you are looking at a set of accounts or a set of estimates.
Key points
- Read for liquidity and ownership first, detail later
- Current and quick ratios differ by how much sits in inventory
- Receivable days above your terms means you are financing customers
- Receivables growing faster than revenue is collection slippage
- A balance that ties only to itself has not been verified
Practical checklist
- Compare current assets to current liabilities
- Compare equity to total assets
- Calculate receivable days and compare to your terms
- Check whether inventory is growing while revenue is flat
- Question any unchanged provision or related-party balance
- Ask what sits inside "other receivables"
- Ask when the three largest balances were last reconciled
