Numbers don’t lie. What does your balance sheet have to say?
There are so many financial documents you are supposed to have as a business owner, it can be difficult to keep up with what’s what, and even more so, how to manage these documents efficiently. Let’s take a look at one of the most important documents in your entire business, the balance sheet, and why is it is crucial to your business’s success.
A balance sheet is a financial statement that gives you a bird’s-eye view of your small business at a given point in time. You might prepare one monthly, quarterly, or annually. The document contains information about your assets, your liability, and your equity.
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Balance sheets are an absolute necessity for your business because they make it possible for you to evaluate its overall strength and health — something every business should want to know.
A balance sheet can help you answer many questions, including:
- Is it time to expand my business?
- Do revenue fluctuations severely impact business operations?
- Are cash revenues dangerously low?
- Are receivables being collected on time?
- Is business slowing down or picking up?
- But balance sheets are essential for many other aspects of operating your business.
Along with income statements, they are used by investors, lenders, and vendors to determine how much credit to grant. So, not only is the balance sheet telling you what’s going on with your business — it’s telling others too.
The Elements of a Balance Sheet
On the balance sheet, there are different types of assets, and they are categorized by how easily they can be liquidated. Cash is a very liquid asset while assets like property and equipment are less liquid because of the time it may take to sell them and turn them into cash.
Current assets are things like money market accounts and receivables. In most cases they can be converted into cash assets in within one year.
A final type of asset is a fixed asset. Fixed assets include things like the land and buildings you own, machinery, equipment, and vehicles that comprise part of your business.
For a big-picture take on your business’s performance, you can review the total fixed assets and total assets sections of a balance sheet. The first provides you with the total dollar value of all the fixed assets you hold minus any depreciation. The second represents the sum of your short-term and long-term assets.
As you probably expected, the liabilities listed on your balance sheet include any of the debts or other financial obligations you owe. These can include credit extended by your vendors, banks, and other lenders, but they also include other outstanding payables and any payroll and withholding you owe.
Like assets, the sum of your liabilities can be expressed on a balance sheet in terms of your total current liabilities and your long-term liabilities. Total current liabilities include everything you must pay within one year, and long-term liabilities are those things that are due more than a year from the current date.
This part of a balance sheet might also be called stockholders’ equity, and it comprises your initial investments and the funds you have reinvested in the business. The more equity you have, the better.
Your total liabilities and owner’s equity tells you how much you owe to others.
It’s virtually impossible to keep your business afloat without a balance sheet. If you’ve gotten this far without regularly checking yours, bravo. But, you should still kick that habit.
Just like your vital signs can lead to the discovery of potential problems with your health, a balance sheet can help you pinpoint areas of concern within your business as well as show you what you’re doing right. Your balance sheet can provide so much insight into your business,it would be foolish not to actively check this document.
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Meredith is the Editor-in-Chief at Fundera, an online marketplace for small business loans that matches business owners with the best funding providers for their business. Prior to Fundera, Meredith was the CCO at Funding Gates. She is a resident Finance Advisor on American Express OPEN Forum and an avid business writer. Her advice consistently appears on such sites as Yahoo!, Fox Business, Amex OPEN, AllBusiness, and many more.