Unless you’re an accountant or a financial planner, you probably didn’t go into business with the hopes of producing and studying a balance sheet. But sound financial management is one of the pathways to business success, so getting your hands on key financial statements is essential.
What is a Balance Sheet?
Your company’s balance sheet is one of the three main financial statements that you’ll use to keep tabs on the health of your business, with the other two being the income statement and cash flow statement. It gives you a snapshot of what your firm owns and owes as of a certain date, such as the end of a month, quarter, or year.
What you own is referred to as assets, such as equipment, inventory, accounts receivable, and cash on hand. What you owe is also called your liabilities, which can include loans due, taxes, and accounts payable. The difference between these two is your company’s net worth or its equity.
The Benefits of Using a Balance Sheet
Beyond simple survival, most businesses have growth and expansion goals. Your balance sheet will not only tell you whether you have the financial resources to deal with what is on your plate today, but also if you can manage fluctuations or possible expansion.
When it comes to managing operations, your balance sheet will give you insight into where you need to pay bills, collect money that you are owed, and better manage your inventory.
How to Make the Best Use of a Balance Sheet
Balance sheets are produced with a specific format and adhere to established formulas. A standard balance sheet will list your assets first, then liabilities. At the end of the report, there will be figures for your “net worth” or equity and then your total liabilities and net worth, which will equal your assets.
You can use a balance sheet to manage your small business by first taking a close look at your assets. These are divided into current assets, which can be converted to cash within 12 months, and fixed assets, which are expected to be around for 12 months or longer.
Your current assets include cash in the bank, accounts receivable, and inventory. Make sure you have sufficient cash on hand to pay your bills, have a system in place for collecting timely payments from customers, and are managing your inventory efficiently. Fixed assets such as buildings, vehicles, and equipment should be monitored as well for depreciation, tax, and insurance purposes.
Your liabilities are also divided into “current” and long-term categories similar to your assets. Current liabilities include accounts payable, taxes, and loans. Ensure that you are paying your own vendors promptly, are keeping up with your tax obligations, and don’t miss loan payments. Loans with terms longer than 12 months are considered long-term liabilities on your balance sheet.
When you subtract your current liabilities from your current assets, the resulting figure is your net worth. Ideally, this is a number that is increasing over time. Another useful figure that you can derive from the balance sheet is called the current ratio, which is your current assets divided by current liabilities. This number illustrates whether you are financially solvent, and should be greater than one.
Your company’s balance sheet is one of the main financial reports that can help keep your business running smoothly both short and long-term. It’s vital that you understand how to interpret one of these reports, but you don’t have to know how to prepare it.
At Capital Business Strategies, we help small and medium-sized businesses throughout the Mahoning Valley area meet their accounting, bookkeeping, tax, and payroll needs. Contact us today to learn more about the ways our services can help your business achieve its goals.