Shining A Spotlight On The Business Balance Sheet
Hands up if you’ve ever been presented with a balance sheet by your accountant but have no idea what’s on there or what you are meant to do with it?
You wouldn’t be alone.
Balance sheets (and other financial statements) can be confusing to business owners. But, along with your profit and loss statement, the balance sheet is one of the most valuable documents for your business.
What does it do that is so important?
Well, because we know a balance sheet can be a bit complicated to understand, we’ve put together a quick guide on what you’ll see on the balance sheet and what it can tell you.
Let’s take a look now.
What Is A Balance Sheet?
A balance sheet shows the financial position of your business at any given time. Often balance sheets are prepared once a year, but cloud accounting software like Xero makes It easier to create a balance sheet more often.
It’s different from a profit and loss statement, which shows finances over a certain period.
Your balance sheet shows you:
Assets
Assets are things that you own in the business that could be converted to money. Assets are current or liquid - that means, cold hard cash or items that can be easily converted to cash, such as stock. Or they can be fixed - things that are held in the business long-term and cannot easily be sold, such as equipment or vehicles.
Liabilities
Liabilities are the amounts that you owe to other people. Current liabilities need to be paid within 12 months, such as invoices or taxes. Long-term liabilities will be paid off over a longer period, such as a loan or vehicle lease.
Capital or equity
This is the value of the business once your liabilities (how much you owe) have been subtracted from your assets (what you could sell to pay your debts). Hopefully, this will be a positive number, and the higher, the better.
Why Is It Important To Keep An Eye On Your Balance Sheet?
There are a number of ways the Balance Sheet report can help you in your business. They are:
It tells you how healthy your business is
A balance sheet is a snapshot of your business’ health at any point in time. You want the numbers within it to show that, at the very least, you would be able to cover your bills. But hopefully, you’ll see that there is a healthy profit.
The balance sheet also shows you how many liabilities you are currently handling. Too many of these could be bad, especially if you don’t have a lot of money pay them off.
By understanding what your balance sheet is showing, you can take steps to correct any shortfalls or plan to invest your profits for even more business success.
You can see trends in your business
Although balance sheets only provide a snapshot in time, reviewing them collectively can help you see trends in your business. That can include things like an increase in liabilities year on year, or an extended length of time before some customers pay.
All of the issues can be addressed once you are aware of them. And we all know that reduced issues mean better business! You can use your balance sheet in conjunction with your profit and loss statement to identify these trends.
It can help you get extra finance
Need a line of credit or a loan to buy some new equipment? Your balance sheet can help you get it. Some banks or lenders will want to see your balance sheet before extending your credit, and potential investors may also ask to see it.
If your balance sheet tells a positive financial story, then lenders and investors will be more likely to invest in your business.
It’s useful when preparing to sell
If you are getting ready to sell your business, then a balance sheet tells you how attractive it might be to potential buyers at that point in time. Buyers will be looking for balance sheets with low liabilities and a lot of positive equity to know they have a good investment.
Even if you aren’t ready to sell your business just yet, you can use your balance sheet to build part of your exit strategy. Maybe it tells you that you need to reduce liabilities before the business will sell well, or maybe you are just confirming your business is in a good place while you wait for the right time personally. Whatever the reason, your balance sheet can help you exit the business positively when the time comes.
Helping You Understand Your Balance Sheet
As a business owner, you can put together your own balance sheet using your records. But it’s a much better idea to get a professional to do it for you, so you know that all your figures are correct.
Our team can prepare your balance sheet alongside your other financial documents as part of our accounting services. And because we love nothing more than seeing businesses succeed, we can help you to understand it and use it to your advantage and offer expert advice on how to build on it.
Contact us today to talk to one of our team about our accounting services.