Updated on April 19th, 2023
The benefits of a balance sheet assist business owners in having an overview of their income, assets, and liabilities. A balance sheet is necessary for lenders to determine how much money to loan a company.
Brad Nakase, Attorney
Email | Call (888) 600-8654
It is important for every new business owner to take the time to understand his or her company’s financial statements. If an entrepreneur does not accurately comprehend his or her financial date, then they may not see opportunities to improve their company’s finances or know when they are in trouble.
All business owners should be sure to use a balance sheet, one of the major financial documents for businesses. This document can be used to keep track of a company’s financial health. Balance sheets can help guide management decisions, and they can also report a business’ financial status to investors, banks, and stakeholders. Balance sheets essentially show what a business owns, or its total assets. For this reason, balance sheets are often referred to as statements of financial position. A balance sheet also shows what a company owes at any point in time, otherwise referred to as the company’s liabilities. The difference between the asset amount and the liability amount equals the company’s net worth.
By closely monitoring a company’s finances, a business owner can identify potential problems before they develop. Recent research has shown that almost 30% of small businesses fail due to lack of cash flow. Proper financial reporting can help prevent this issue. Owners who are made aware of the issue early on have a better chance of countering it with solutions.
In the end, a balance sheet offers a business owner all the financial information he or she needs to maintain and grow their business. The good news is that it is not complicated to create a balance sheet. One simple document can therefore help a businessperson manage company finances and make the relevant adjustments. What is there to lose?
This article will go over the three major advantages of using balance sheets and how they can reward a business. It will also review why not investing in a balance sheet can lead to consequences for a business.
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:
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:
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.
Blog: Business | Corporate | Employment Law
