How to Read a Balance Sheet – And Why You Care! 2019

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Practical and entertaining education for
attorneys, accountants, business owners
and executives, and investors.
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DISCLAIMER
The material in this webinar is for informational purposes only. It should not be
considered legal, financial or other professional advice. You should consult with an
attorney or other appropriate professional to determine what may be best for your
individual needs. While Financial Poise™ takes reasonable steps to ensure the information
it publishes is accurate, Financial Poise™ makes no guaranty in this regard.
About this PowerPoint: if you are looking at this PowerPoint without the benefit of
listening to the conversation that surrounded it then you are doing yourself a disservice.
This PowerPoint was prepared in contemplation of being viewed in conjunction with
listening to a one hour webinar on the topic
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MEET THE FACULTY
Moderator:
Jonathan Friedland – Sugar Felsenthal Grais & Helsinger
Panelists:
Michael Schwarzmann – Financial Improvement & Restructuring Professional
Michael D. Pakter – Gould & Pakter Associates, LLC
Josh Johnston – Ankura Consulting Group
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ABOUT THIS WEBINAR:
How to Read a Balance Sheet –And Why You
Care!
A balance sheet provides a snapshot of a company’s assets, liabilities, and equity. It
is one of several major financial statements used to manage a business, and is a
critical due diligence item used by lenders and investors in deciding whether to
provide capital to a business. This webinar explains the basics of understanding a
balance sheet and puts it in context by also touching on the other key financial
statements.
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ABOUT THIS SERIES:
MBA Shortcut
“If you don’t know your numbers, you don’t know your business.” This is a common refrain
that is equally applicable to attorney and other consultants who work with businesses.
This webinar series is designed for you if you are a startup founder, business owner, executive,
investor, attorney or consultant who, though not a finance or accounting professional, finds
herself needing to understand finance and accounting. It won’t make you an expert but it will
give you the tools you need to speak with experts in order to get more out of them and it will
provide a solid foundation on which you can build. Packed with illustrative examples, helpful
anecdotes and real-world case studies, this series teaches you some of the key take things you
need to understand about finance and accounting.
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EPISODES IN THIS SERIES
3/7/19 Episode #1:
EBITDA and Other Scary Words
4/4/19 Episode #2:
How to Read a Balance Sheet –And Why You Care!
5/9/19 Episode #3:
The KPI- Cash Flow Modeling and Projections
6/6/19 Episode #4:
Where Did All My Profits Go? Mastering the Concept of Working
Capital
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Dates shown are premiere dates.
All webinars will be available
On Demand approximately 4 weeks
after they premiere.

Episode #2:
How to Read a Balance Sheet –And
Why You Care!
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INTRODUCTION TO THE BALANCE
SHEET
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"[W]hy is the forgotten financial statement . . . so important for
startups? Because they are not generating profits and free cash
flow in their early days. They’re burning through cash and
accumulating losses (negative shareholder equity) in their early
days as they seek Product Market Fit, increasing sales, and cash-
flow breakeven. Even if gross margins are high, it is the very
rare startup which generates enough gross margin dollars to
cover the entire startup’s operating expenses.”

INTRODUCTION TO THE BALANCE
SHEET (con’t)
• A Company's balance sheet tells management and investors how much
in assets a company has, how much it is owed and how much it owes in
terms of debts, and its resulting net worth (shareholder equity)
• Presents a snapshot of the Company’s financial conditions at a specific
point in time
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WHAT CAN A BALANCE SHEET TELL
AN EDUCATED READER?
• Amount of debt relative to equity
• With the income statement, how quickly customers are paying bills and the
company is paying its bills.
• Increases or decreases in short term cash
• % of assets that are tangible vs. % intangible based on accounting
transactions
• With the income statement, average rates of interest paid on Company's
debts
• Liquidity and nature of assets
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WHAT A BALANCE SHEET DOESN’T
TELL YOU
• “Off-balance Operating lease
✓ Leaseback agreements
✓ Collateralized debt obligations
✓ A/R
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HOW IS THE BALANCE SHEET DIFFERENT
FROM OTHER FINANCIAL STATEMENTS?
• Recall the Balance Sheet is a snapshot of Company’s financial condition at
specific point in time
• Balance Sheet vs. Income Statement
• Income statement measures record of company’s revenues matched with
costs to net loss or profitability
• Balance Sheet vs. Cash Flow Statement
• Cash flow statement measures actual changes in cash compared to the
income statement, shows where cash is coming in and going out
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BASIC COMPONENTS OF THE
BALANCE SHEET
• Assets
• Liabilities
• Equity
The Balance sheet must
Balance – these three
categories must “net out,”
to zero.
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ASSETS
• Generally recorded at cost (or lower), not Fair Market Value. Most
things of value controlled by the Company
• Broken out on the Balance Sheet between various classes of assets,
including
✓ Current Assets
✓ Noncurrent Assets
✓ Other Assets
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ASSETS (con’t)
• Current Assets
✓ Assets that are likely to result in cash inflows or benefit with a
lifespan of 1 year or less
✓ Includes:
o Cash/cash equivalents
o Accounts receivable
o Inventory
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ASSETS (con’t)
• Noncurrent Assets
✓ Long term investments where value will be realized over more than one
year
✓ Includes:
o Tangible assets (machinery, buildings, real estate, office equipment)
o Intangible assets (goodwill, patents, copyrights)
✓ Depreciation or Amortization is calculated and deducted from most of
these assets to reflect in the income statement used up value during an
operating period.
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ASSETS (con’t)
• Other Assets
✓ Assets that do not fit within either class of assets above, but must
be accounted for on the Balance Sheet
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LIABILITIES
• Debts or other financial obligations owed by the Company to others
• Broken out on the Balance sheet between various classes of liabilities,
including:
✓ Current Liabilities
✓ Noncurrent (i.e. long term) Liabilities
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LIABILITIES (con’t)
• Current Liabilities
✓ Debts or non-debt financial obligations that must be paid or will come due
within a year of the date of the Balance Sheet
✓ Includes:
o Accounts payable
o Wages
o Interest
o Warranty liability
o Unearned revenues
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LIABILITIES (con’t)
• Noncurrent/Long Term Liabilities
✓ Debts or non-debt financial obligations due after a period of at
least a year from the date of the Balance Sheet
✓ Includes:
o Notes payable
o Bonds payable
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EQUITY
• May be referred to as “Owner’s Equity,” “Shareholders’ Equity,” “Net
Worth,” etc.
• The resulting balance of shareholders’ investments after accounting
for assets and liabilities.
• Also characterized as the initial amount of money invested into a
company
• Retained earnings: net earnings reinvested into the Company at the
end of its fiscal year, rather than making shareholder distributions
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EQUITY (con’t)
• Each class of equity should be accounted for on the Balance Sheet
(common shares, preferred shares, retained earnings, etc.)
• Balance Sheet’s calculation of equity is considered “Book Value”
✓ Book value may be informative in some cases, and meaningless in
others
✓ Will differ based on industry, business models, and other factors
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Source: https://www.accountingcoach.com/wp-
content/uploads/2013/10/05X-table-03@2x.png
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ANALYZING BALANCE SHEETS:
VERTICAL ANALYSES
• Proportional analysis of financial statement
• Each line item listed as a % of another item.
• Usually means every line item stated as % of total assets.
• Commonly used for specific time period, to see relative proportions,
and to note changes in company’s investment in working capital and
fixed assets over time.
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HORIZONTAL ANALYSES
• Comparison of historical financial information over series of reporting
periods,
• Intended to show whether any numbers are unusually high or low in
comparison to information for bracketing periods,
• Flagged items may trigger investigation to identify reason for differences
• Commonly done by grouping information sorted by period
• Usually performed in 2-year format, with variance showing difference
between the 2 years for each line item
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RATIO ANALYSES
• Financial ratio analyses can be applied to a Balance Sheet (often in
connection with other financial statements) to understand a company’s
overall health
• Example #1: Quick Ratio
✓ Quick Ratio = (Current Assets – Inventory) / Current Liabilities
✓ Measures company’s ability to meet short-term obligations with liquid
assets
✓ Higher = Better
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RATIO ANALYSES (con’t)
• Example #2- Current Ratio
✓ Current Ratio = Current Assets / Current Liabilities
✓ Simple method for determining company’s ability to repay short
term liabilities
✓ If ratio is below 1; red flag (indicates struggles to pay short term
liabilities)
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RATIO ANALYSES (con’t)
• Debt to Equity Ratios
✓ Used to determine how company is financing growth
✓ Higher ratio indicates growth through debt
✓ Numerous means of calculating
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ANALYZING
BALANCE SHEETS:
RATIO ANALYSES
(con’t)
• Additional Examples of
ratios used to analyze
balance sheets
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Source: https://www.oldschoolvalue.com/blog/valuation-methods/balance-
sheet-ratios/

ABOUT THE FACULTY
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Jonathan Friedland – jfriedland@sfgh.com
Jonathan Friedland, a senior partner with Sugar Felsenthal Grais & Helsinger, LLP, views his
job simply: to make money for clients whenever possible and to protect their interests at every
turn. Licensed in four states, Jonathan’s transactional work focusses on representing private
funds and other owners of private businesses, and the businesses they own. He regularly
advises on M&A activities, structuring new ventures and restructuring old ones, and on other
commercial relationships. Jonathan is rated AV® Preeminent™ by Martindale-Hubbell, 10/10
by AVVO, and enjoys several other similar distinctions. Jonathan graduated from the State
University of New York at Albany, magna cum laude (in three years) and from the University of
Pennsylvania Law School. He clerked for a federal judge before entering private practice and
served for several years as an Adjunct Professor of Strategic Management at the University of
Chicago’s Graduate School of Business. Jonathan is lead author and editor of several significant
treatises, several chapters in other treatises, and scores of articles on law and business.
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Michael Schwarzmann – michaelschwarzmann@yahoo.com
Michael Schwarzmann has over 20 years’ experience helping identify opportunities to create value for his
clients. I have extensive experience working with established companies when they encounter financial
difficulties by assisting them in developing solutions to address short term cash needs and longer term
profitability. My process includes helping to identify cost savings and value capture scenarios by
analyzing historical financial performance along with current operations and projecting optimizing
strategies. Utilizing weekly and monthly cash flow statements, budgets, and forecasts, I utilize a focused,
data driven approach to identifying opportunities to increase company profitability. Through a broad
review of financial, operational and strategic performance, I help guide companies to increased
profitability. Working across the organization, vertically and horizontally, uncovers additional solutions
and generates greater buy-in of the goals, objectives and action plan, all of which are critical to maximize
the impact of proposed changes. I utilize my legal knowledge to seamlessly work with counsel to identify
and address legal issues in a more cost effective manner. I have guided the development and evaluation of
business plans and formulated successful strategies to preserve or improve asset values. I am a consensus
builder. Industry experience includes: health care, manufacturing, agricultural, construction, restaurants
and franchising, energy and travel.
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Michael D. Pakter – mpakter@litcpa.com
Mr. Pakter focuses his professional practice on forensic accounting, economic damages, financial
analyses, distressed businesses, fraud/financial investigations, business valuation, business economics
and litigation support services. He has provided expert services in matters involving accounting, lost
profits/earnings, business interruption, breach of contract, audit failure, analysis of financial
transactions/balances, alter ego, bankruptcy, fraud, accounting books and records and the reconstruction
of incomplete, misstated and/or falsified financial information. Mr. Pakter provides consulting and
dispute avoidance/resolution services to trial lawyers, trustees, examiners, receivers, business owners
and managers and units of federal, state and local government. Many engagements combine complex
financial analysis, economic damages, valuation and distressed business issues, often involving applying
many professional disciplines to assist in resolving complex commercial litigation and business disputes.
Mr. Pakter has 40 years of experience in accounting and forensic accounting, business economics and
investigations in numerous industries and diverse engagements, including more than 20 years of
experience in economic damages and business valuations. State, Federal and Bankruptcy Courts, as well
as arbitrators, have recognized him as an expert in accounting, forensic accounting, economic damages,
financial analysis, business valuation and business economics. He has served as a Rule 213(f)3 expert
witness, a Rule 30(b)(6) witness and a Rule 1006 witness.
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Josh Johnston – Josh.Johnston@ankura.com
Josh Johnston is a Senior Managing Director at Ankura with more than 20 years of
experience as an auditor, forensic accountant, investigator, and expert witness. He
has testified on damages valuation, lost profits, asset tracing, accounting principles,
accounting fraud, and embezzlement, as well as other accounting and forensic
topics. He serves as a neutral accountant or consultant in purchase price disputes
over working capital adjustments and earn-outs and assists clients with bankruptcy
and restructuring accounting matters. He is based in Dallas.
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QUESTIONS OR COMMENTS?
If you have any questions about this webinar that you did not get to ask during
the live premiere, or if you are watching this webinar On Demand, please do
not hesitate to email us at info@financialpoise.com with any questions or
comments you may have. Please include the name of the webinar in your email
and we will do our best to provide a timely response.
IMPORTANT NOTE: The material in this presentation is for general educational purposes only. It has been prepared primarily
for attorneys and accountants for use in the pursuit of their continuing legal education and continuing professional education.
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ABOUT FINANCIAL POISE
DailyDAC LLC, d/b/a Financial Poise™ provides
continuing education to attorneys, accountants,
business owners and executives, and investors. Its
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English, entertaining, explanations about legal,
financial, and other subjects of interest to these
audiences.
Visit us at www.financialpoise.com.
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How to Read a Balance Sheet – And Why You Care! 2019

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