3 Benefits of Using a Balance Sheet
There are a number of benefits of using a balance sheet to track a business’ finances. These advantages include the following:
1. Balance Sheets Determine Risk and Return
A balance sheet lists all of a company’s assets and liabilities, which allows a business owner to assess the company’s ability to generate money and keep operations running. In a perfect world, a business should have more assets listed on its balance sheet than long term liabilities. This difference would indicate positive net worth.
By comparing current assets to current liabilities, a business owner can determine whether his or her company can cover its short-term debts. If a business’ current liabilities are greater than its cash balance, the company may need additional capital from outside financing.
Luckily, a balance sheet can show a business owner when debt levels are not sustainable. It can essentially act as a warning siren. If a business has too much debt on its balance sheet, then the company might default on payments or be forced into bankruptcy. A balance sheet can therefore help a business owner identify serious financial problems before they develop to the point of no return.
2. A Balance Sheet Can Be Used to Secure Business Loans and Funding
A balance sheet has the advantage of allowing outsiders to examine the company’s financial status. In fact, most lenders ask to view a balance sheet to determine:
- The security of the business’ financial health
- The business owner’s credit history
- The business’ track record of repaying debts on time
Potential investors may also assess a business’ balance sheet before offering funding. They will want to know where their capital will go and when they can expect to be repaid.
Because it is continuously updated, a balance sheet can show a company’s ability to collect payments and repay debts. It also shows business lenders that the company is responsible when it comes to managing assets and liabilities. A balance sheet is therefore an important part of applying for a business loan.
3. Business Balance Sheets Offer Helpful Ratios
A small business’ performance is often measured using ratios. These ratios analyze financial aspects such as:
- Productivity
- Liquidity
- Profitability
- Solvency
These financial ratios can assess the sustainability of a business in the long-term. A business’ balance sheet provides all the information required to conduct these ratios.
In essence, a balance sheet is a picture of a company’s overall capital structure at any given time. It has the ability to show how long it takes to sell inventory, as well as the length of the accounts payable and accounts receivable.
This information can help a business owner determine trends, as well as how well the company is doing against competitors.
