Many businesses have financial commitments beyond the liabilities shown in their Balance Sheet. It’s wise to be aware of them.
For example, (and before builders email me, I know it doesn’t happen like this but this is just for easy illustration!) you may have contracted a builder to build a 30-storey building but at the end of the accounting period only 11 storeys have been built. The cost of these 11 storeys will be shown in the Balance Sheet as Capital Work-in-Progress.
However, you’ve contracted and committed to pay for the complete building so the cost of the remaining 19 storeys will be a financial commitment that isn’t in the Financial Statements at all.
Your Financial Statements may look quite rosy but look again after the financial commitments have been included. Do they still look rosy? These payments can be large and you’ve legally committed to make them, perhaps in the near future.
So, be aware of your financial commitments. In annual reports, they’re shown in a note in the annual report that usually isn’t cross-referenced to the Financial Statements themselves. You just have to know it’s there. Of course, in internal reports these commitments should be highlighted too.
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