Warning: there are some serious accounting terms in this post! But they are terms that every business owner needs to know. When I work with clients as an outsourced CFO, I tend to spend a bit of time working through the balance sheet. A poorly managed balance sheet has the tendency to burn up cash, and I’ve never met anyone who likes to burn cash. If you’ve ever found your business sales rich but cash poor, it is likely the result of a poorly managed balance sheet.
Over the next few weeks we are going to look at Boyd’s 2015 balance sheet. More importantly, however, in coming weeks we will use the balance sheet to calculate some operating and financial metrics used by Wall Street analysts to measure the health of a company and to see how your company compares.
What is a Balance Sheet?
The balance sheet summarizes the assets, liabilities and shareholder equity of a business at a specific point in time. Whereas the income statement and cash flow statement represent results over a period, the balance sheet is a snapshot as of a specific date. So while you can look at a P&L for the month of April, you can only look at a balance sheet on a specific day, for example, April 30th.
There are 3 categories on a balance sheet: assets, liabilities, and stockholder equity. Assets are what a company owns, liabilities are what a company owes, and stockholder equity represents what is left over. This is represented by the fundamental equation: Assets – Liabilities = Equity. In Boyd’s case, as of December 31, 2015, total assets were $639 million, total liabilities were $454 million and total equity was $185 million (all amounts are in Canadian dollars unless otherwise specified). Year over year, assets increased 31%, liabilities increased 29%, and equity increased 36%.
Assets are broken down into short term (or current), long term, and intangible. Short term or current assets are items that can be converted into cash on a relatively quick basis. Things like cash and savings, accounts receivable, work in process (WIP) and inventory, and pre-paid expenses. On December 31, 2015, Boyd recorded $175 million in current assets, consisting primarily of $75 million in cash and $65 million in accounts receivable.
Long term assets are items that are generally more difficult to quickly convert into cash. These include leasehold improvements, shop tools and equipment, office equipment and computer hardware, as well as buildings, and signage. On the balance sheet these assets are recorded at the price they were purchased less accumulated depreciation. In Boyd’s case, the bulk of long term assets are shop equipment and leasehold improvements. Boyd, along with other large consolidators, tend not to own real estate. But that does Boyd does invest heavily in shop equipment and leasehold improvements – $44 million in 2015 alone.
After long term assets you will find intangible assets on the balance sheet. Intangible assets are things you cannot touch but still create value, like trademarks or brand names, customer relationships, and non-compete agreements.
Goodwill is a specific type of intangible asset. It arises as a result of an acquisition. Most companies are purchased at a premium to the book value of assets because most companies have customer relationships or management teams in place that are valuable. But the values of these assets are often not fully reflected on the balance sheet. As a result, when a business is acquired at a premium to book value, goodwill is created. (curious how much goodwill is hidden inside your business – shoot me an email for a confidential conversation).
As of December 31, 2015, Boyd recorded $464 million in long term and intangible assets, consisting of $133 million in plant, property and equipment, $144 million of intangible assets, and $184 million in goodwill.
Similar to assets, liabilities are also divided into short term (or current) as well as long term. Short term liabilities are liabilities that are payable within the next 12 month, such as accounts payable, any short term borrowing and leases, and the current portion due of long term debt and leases. You will also find deposits received from insurers and customers recorded as an unearned income liability.
At the end of 2015 Boyd had $149 million in current liabilities, $134 million of accounts payable and other accrued liabilities, and $15 million consisting of the current portion of long term debt and leases.
Long term liabilities generally include long term debt, or debt that is due longer than a year out as well as financial lease obligations. Financial lease obligations are related to equipment and upgrades as opposed to lease agreements. While the company may enter into long term facility lease agreements, these are only reflected in operating expenses and not reflected on the balance sheet due to current accounting standards.
At the end of 2015 Boyd had $140 million outstanding in long term debt, convertible debt, and financial leases. However, in early 2016 Boyd eliminated $24 million in convertible debt principal by converting the debt to equity shares.
Separate from long term debt, Boyd also has a number of liabilities associated with the legal and capital structure of the company. Because the company has issued certain types of debt and equity that are exchangeable or convertible, as well as stock options to management, the company is required to recognize the future liability associated with these financial instruments. I’ll spare you the details at this point but feel free to email me directly if you’re curious.
After separating assets from liabilities at book value, $185 million in equity remains. Over the course of its existence, Boyd has raised $222 million in equity capital, purchased $4 million in outstanding shares, accumulated $75 million in other comprehensive earnings primarily from the impact of exchange rates and accumulated a total accounting net loss of $117 million.
Want To Know More?
There is a lot to take in on the balance sheet so I wanted to keep it short. Think you could benefit from having a second set of eyes on your financials? If so, I would like to help. I find the number side of the business as interesting as the operational and strategic side of the business. My goal is to help YOU grow your business.
The balance sheet is packed full of useful information. Next week we will look at a number of ratios and KPI’s that tie all three financial statements together to give us a better understand both the operations and the financial health of Boyd and better manage your business.
Until Next Week!