When it comes to accounting, few things are more crucial than the balance sheet. This snapshot shows the money you have, where it’s kept and your net worth.
The balance sheet is crucial if you want to attract investment, secure a loan or even sell your firm.
Along with an income statement and a cash flow statement, the balance sheet is important as it gets for any company’s books. And here’s why…
Facts about your balance sheet
A balance sheet gives a preview of your company’s financial records at any one time. It reveals your assets (what you own), your liabilities (what you owe) and the owner’s equity (what money is left over). It’s normal for companies to prepare a balance sheet either monthly, quarterly or annually.
A balance sheet will reveal your company’s financial health at a glance and help you calculate key things such as debt to equity ratio which helps basic forecasting in terms of current assets versus current liabilities. This simple calculation tells you whether or not you can pay your debts in the next 12 months.
Balance sheets are also useful when comparing progress/change in an organisation from the previous year. You can look at where you were a year ago or maybe even ten years ago.
This is huge in terms of progress and monitoring how far you’ve come as a business.
The first item on the balance sheet is assets – what do you have? Items classed as short-term assets include money in the bank, money being transferred from another account, money owed to you by customers, short-term investments, prepaid expenses and stock.
Long-term assets include buildings and land, machinery and equipment and long-term investments.
Next up is liabilities, which is what you owe to others. Liabilities include wages owing, loans being paid within a year, tax bills, money owing to suppliers and any other immediate bills. Long-term liabilities could be bonds and long-term loans and investments.
Third and finally is equity, arguably the most important section for any business owner. This is the amount owing to you after taking care of liabilities. This will include capital (money invested into the business by the owners) and any private or public stock.
A balancing act
Now you know the basics surrounding, why not put it into practice? It’s healthy for any business to be able to get a snapshot glance of their financial health, and this simple tool allows you to do that.
As a result, you see what you’ve put in, what you owe and how much is left for you at the end of the day at a glance. And hopefully it’s good news!
Your accountant will provide you with a balance sheet, but you can also create them through software, such as Xero. In fact, they offer a free template to download if you’d like an example.
If you want help understanding a balance sheet, then contact us today