Assets are the sum of the assets that a company owns intended to increase its wealth, while liabilities explain who owns the asset.

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When talking about assets, when we say assets, we should not only understand capital in cash or bank accounts, but the possession of production tools will also form part of the company's assets because they have a value and, in the same way, they will also be observed as assets (as investment), the expenses necessary for the proper development of the business, such as market research or the costs of setting up a company. But the assets are not limited to money or physical property, but rather the rights that a company has over third parties in The form of debts receivable are also observed as part of a company's assets. Regarding liabilities, their function is to explain who owns each element of the asset. Thus, not only will the company's own capital make up the liabilities, but the debts that the company has with third parties will also form part of the liabilities, since they do not mean anything else but that other people own part of the business's properties.

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Principles of Financial Equilibrium

Equity balance, also known as financial balance or accounting balance, refers to the situation in which a company has a solid and stable financial structure. It involves equality between a company's resources and debts at any given time. In other words, equity balance is achieved when a company's assets (such as cash, inventory, property, etc.) are equal to its liabilities (such as loans, accounts payable, long-term debts, etc.). Equity balance is critical to a company's financial health for several reasons:

• Financial Stability: An adequate balance sheet indicates that the company has sufficient assets to cover its financial obligations, providing economic stability.
• Credit strength: Companies with a solid balance of assets are more attractive to lenders and have an easier time obtaining credit if needed.
• Sustainable growth: Maintaining an adequate balance of assets is essential for long-term growth. It allows the company to invest in new opportunities without compromising its financial stability.
• Decision-making: It provides managers with information about the company's financial health, helping them to make informed decisions about investments, expansion, and other operations.
• Investor Confidence: Investors and shareholders rely more on companies that demonstrate a strong balance of equity, which can increase the value of shares and improve the company's reputation in the financial market.

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In short, equity balance is essential to ensure that a company has a solid financial base that allows it to grow in a sustainable manner and face economic challenges.

‍Asset: The asset is divided into two major categories; the Current assets and fixed assets. The criterion that places an asset in one field or another is that of liquidity. Since the purpose of all business and, by correspondence, of all its assets, is none other than to produce money, it is said that the ideal principle of the asset is its flow into its most liquid form: cash. In this way, raw materials are converted into ready-made products and these into sales and, consequently, into customer balances. But for the time being, all the examples of assets mentioned above are part of current assets. Fixed assets would include assets such as buildings or machinery, which are converted into current assets through their amortization, creating a Depreciation Fund with the compendium of annual amortizations intended to replace fixed assets once they become obsolete or worn out by use.

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‍Passive: If the asset has a tendency towards the liquidity of assets, The passive is guided by a similar principle, with the difference that in your case, the liability gradually moves to its enforceability. The most enforceable asset are short-term debts contracted with third parties, decreasing in enforceability as the period in which they must be returned increases. A mortgage would constitute the least enforceable type of passive debt. And the own funds that the partners have invested in the company, since they remain immovable except in exceptional situations, are the least enforceable type of liability. In liabilities, however, we will not only observe the level of enforceability of the liabilities during the asset analysis. We will also look at the reason why a liability is enforceable, distinguishing between legal causes —the need to repay a debt contracted within the specified period— and strategic causes —such as replenishing assets—.

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Strength of the Equity Structure

The strength of a company's assets is determined primarily by the balance between the cash flows of liabilities and the cash flows of the asset. If there is a gap between them and there is a greater flow of debt not compensated by our liquidity, there will be a situation in which the company will not be able to meet its immediate debts, while if the opposite happens and the company has a lot of liquid depending on what it must pay in concepts of maximum chargeability debts, it will also be problematic, since it will be an indicator that the company does not invest its resources optimally, hindering its growth. Since setbacks may arise in the process of converting assets into liquid and the risk of losses in the business, it is necessary that at least a portion of the asset be financed with the company's own funds. The optimal situation is one in which the fixed asset is financed through the combination of own funds and part of the long-term receivable debts, the other part of the long-term debts being destined to finance current assets, together with the short-term liabilities. The following table shows this:

Analysis of liabilities

Indebtedness: It is the most important factor to review during the analysis of liabilities, and is measurable using the formula known as the Debt Ratio in which:

The result of this formula will provide us with an indicator of degree of security that the company can offer to its creditors. At this first level of debt analysis, we cannot conclude an optimal or negative financial situation of the company, we can only conclude its capacity to contract new debts.

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‍Indebtedness Quality: As we have said, a mere initial analysis of the debt is not sufficient to make relevant conclusions about the financial state of the company. There are a number of factors that influence the perception of the debt contracted:

• Debt enforceability: We must divide indebtedness into a ratio that contemplates long-term indebtedness and another that contemplates short-term indebtedness.
• Expiration of credits in long-term debts: A two-year loan is not the same as a ten-year bond issue.- Nature of the creditor: The creditor will vary the possibility of claiming the debt. A bank will be interested in collecting it on time, while a supplier may be more flexible to accept a delay because they plan to sell back to the company and thus obtain more profit.
• Debt Renewal: It is also important to assess which debts will be constantly renewed (supply of materials) and which will be express (bank loans).
• Discriminate self-funding: Finally, when studying a Balance Sheet and looking at debts, we must not let self-financing resources — reserves, retirement funds and amortization funds — camouflage a poor financial situation by contributing more assets, since they are legally unenforceable debts generated internally by the company itself.

Solvency

Solvency is the ability to answer in your Assets for the Liabilities required by third parties. That is, the ability to pay off your receivable debts. It is subdivided into two types of solvency:‍

• Warranty Solvency: Calculated by subtracting the liabilities due to the asset, indicating what asset you would continue to have to settle all your debts.‍
• Current Solvency: It measures the ability of a company to meet the payment of its short-term liabilities with its current assets.

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Ratios: To measure the solvency of a company, there are formulas that allow us to deduct a series of meters. These are the following:‍

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1. Solvency Ratio: It measures current solvency, and will result in working capital, indicating whether the company is able to respond with its current assets to its short-term debts. A value greater than 1 will indicate that the company will be able to respond to its immediate debts with its most liquid asset. Thus, all values higher than the unit will give a favorable solvency ratio, while if it is lower than 1, we will talk about a negative working capital.‍

2. Treasury Ratio: It indicates in a more adjusted way the company's ability to react to situations that require a quick payment of debts, and is calculated by purging the least liquid elements of current assets. Again, a ratio greater than 1 will be favorable, while if it is lower, it will not be optimal, although it may still be sufficient after comparing it with the solvency ratio.‍

3. Liquidity Ratio: This third ratio directly indicates the ratio between cash —the most liquid asset—and short-term debt receivable. If positive, it would indicate an optimal state of the company's treasury.

4. Rotation: It is the fundamental axis on which the theoretical capacity of a company to be solvent revolves. That is, on time in the payment of the installments of their debts. It is calculated by relating asset masses to annual sales.‍

5. Collection times: In order to be competitive, companies grant payment periods to their customers. In the scenario where sales are relatively stable over time, the average term that the company gives to its customers can be deducted from the balance sheet.

6. In the same way that companies grant payment periods, suppliers grant them payment periods. The average number of paydays granted to a company can be measured from the balance sheet with the following formula (suppliers/purchasx365).

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What if the company has no financial balance?

When a company has no financial balance, it means that its assets are not enough to cover its liabilities at any given time. This can be due to a variety of reasons and can lead to a number of financial and operational problems. Some situations that may indicate a lack of financial balance include:

• Excessive debts: If a company has a large amount of debt in relation to its assets, it may find itself in a situation of financial imbalance. High interest rates and debt payments can lead to difficulties meeting financial obligations.
• Insufficient cash flow: Even if a company has assets, if it can't convert those assets to cash in a timely manner, it may face liquidity problems. This may be due to inefficient cash flow management.
• Ongoing losses: If a company experiences recurring losses and is unable to generate consistent profits, its financial balance is compromised. Sustained losses can exhaust the company's resources and lead to solvency problems.
• Devalued assets: If the company's assets lose value significantly, whether due to obsolescence, depreciation, or external factors such as an economic recession, the company may struggle to maintain its financial balance.
• Excessive operating expenses: An unsustainable level of operating expenses relative to revenues can lead to losses and financial imbalance. Companies often face problems when they cannot adequately control their costs.
• Lack of access to funding: If a company cannot secure additional funding when it needs it, it may experience financial difficulties. This may be due to a poor credit rating or a lack of confidence from investors and lenders.

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When a company is in a situation of financial imbalance, it can face serious consequences, such as bankruptcy, the inability to pay suppliers and employees, and the loss of investor confidence. Therefore, it is essential for the management of a company to maintain an adequate financial balance and to take proactive steps to address any financial imbalances that may arise.