Balance Sheet Model of Financial Management
[Watch Video for Detailed Explanation]
What is balance sheet? Balance sheet is a [art of any financial statement which provides the financial condition of a firm on a given date.
Financial management can be explained by a model called balance sheet model. In this model a balance sheet is used to explain financial management decisions. There are many balance sheet formats available and in practice, generally, it is categorized as classified, common size, comparative, and vertical balance sheet. Here we are using the old format of balance sheet called as T shape format or horizontal format. In this format, left side of the balance sheet contains Assets and right side contains Liabilities. At the top of each section contains current assets and current liability respectively. The format is shown in the figure below:
So by using this model we can say.
• The left side tells us about the assets. The bottom section tells us about long term assets. That is capital budgeting.
• The right side of balance sheet says about liabilities. The bottom side says about how you raised the finance for your capital budgeting. That is simply the capital structure.
• The top of both sides together tells us about how the firm managed the operating cash flows? That is working capital management.