We often hear the term balance sheet and it is used in varied contexts, throughout the banking, financial, corporate, real estate and other industries. In fact, it is a necessity in almost every business/industrial sector. Here’s learning more about the term and how it applies to real estate.
By Balance Sheet, we mostly mean a statement of the capital, liabilities, and assets of any entity, organization, business or company, at any specific juncture/time-period/duration, explaining the balance of its expenditure and income over the earlier period. This is a financial statement that is imperative for almost every business or company. It also denotes the equity of shareholders at any specific juncture. Balance sheets are thus regarded as the foundation for working out return rates for investors in any company while also analyzing the capital structure, financial health and soundness of any company. The balance sheet offers a glimpse into what is owned by the company and also the amount that has been invested by the company’s shareholders or investors. These sheets are also used in conjunction with other statements for undertaking a calculation of financial ratios or analysis.
The crucial aspect to remember here is that a balance sheet offers a 360-degree picture into the finances of any entity at any moment. Investors understand how the company is doing financially while also using several parameters that may be understood from this sheet. These include D/E (debt-to-equity) ratio, cash flow statements, operating profits, income statements, etc.
The balance sheet is inextricably linked to the real estate sector, just as it is a pivotal part of any other business. Real estate investors will naturally want to scrutinize the balance sheets of listed real estate developers or other promoters in the company who are seeking funding for new projects or consolidation. Lenders may also ask for balance sheets of developers and all stakeholders while approving project financing.
In fact, investors looking to choose only sound and trusted companies may also want to look at their balance sheets (if they are listed) and then decide. At the same time, real estate balance sheets are also used for tracking the financial position and long-term health of any rental unit/property. Some of the key aspects here include the equity of the owner, assets, and the liabilities. All assets have to be listed (as under ownership) with their market values. All liabilities and debts should be listed. The total assets and liabilities should be calculated thereafter. The latter’s value should be subtracted from the former’s value. This will result in the net-worth/equity of the owner/individual. Rental balance sheets help in tracking operating income for landlords along with other expenditure. It will serve as a basis for filing taxes as well.
