An introduction to balance sheets
A balance sheet is like a road map of your business' financial state. Learn what is a balance sheet, connection between balance sheet and cash flow to run a successful business.
Balance sheets are an integral part of your business accounting, and without a thorough understanding of your company’s financial status, it can be very hard to deal with the ongoing demands of running your business successfully.
Keeping your balance sheet up to date is the first step before making any significant business decision as it can assist with the following questions:
- Can buy new equipment or take on new staff?
- Can I take money from the business for myself?
- I have made a profit in the business but why do I not have any cash?
- Can I survive a downturn?
What is a balance sheet?
A company’s balance sheet is like a road map of its current financial state. It shows clearly what your company owns at a specific time, what is owed to your company by others and gives the broadest possible picture of the solvency of your business. Without a thorough understanding of your balance sheet, it's tough to see whether your business is on the right track or a slippery slope.
What does a balance sheet show?
The balance sheet is divided into two halves. One side will have all of the company’s assets, which includes any buildings your business owns, furniture, computers, company cars, any stocks or shares your company holds, the cash you have in the bank and any stock you are holding for sale to customers.
The other side outlines any liabilities your company has, such as loans you have taken out, bank overdrafts and money that you owe to others, such as contractors you may have worked on projects with.
How to keep your balance sheet updated
Whenever there is a change in the assets the business holds or the liabilities it has, the balance sheet really should be amended. For example, if a piece of key equipment is sold, upgraded so it increases in value, or loses value for a reason, that should be added to the balance sheet. Any additional loans taken out, sales of property, change in the marque of the company cars – all of these will mean your balance sheet will need to be updated.
If you are looking to raise money for your business, whether through a loan or sale of equity, for example, your balance sheet will become a very important document. Given you may need to do this at short notice if your company takes an unexpected hit, you should always keep your balance sheet up-to-date. Even if you don’t need to raise funds, a balance sheet with all current assets and liabilities will allow you to keep a close eye on the health of your business. Overall, a balance sheet helps you to stay in control of your business finances.
How your balance sheet relates to cash flow
While your balance sheet does not show your cash flow specifically, it does work very closely alongside your cash flow forecasts, which is another reason to keep your balance sheet current. Your cash flow will help you to understand what is coming into or going out of your business at any time. An accurate cash flow forecast means you can look ahead to ensure you will have enough funds to cover future bills, such as tax and VAT or pension liabilities for your employees.
Having a good handle on your cash flow is essential to running your business effectively, but without a clear and structured balance sheet with all liabilities outlined, your cash flow forecasting cannot be as effective, which puts your company’s financial future at risk.
Keeping your balance sheet in good order is a key part of managing your business finances.
Having a strong understanding of your balance sheet is the best way to keep your business accounts healthy and will give you the comfort to make quick and beneficial decisions at all stages for your business.
This article contains general information and is not intended to provide information that is specific to American Express, or its products and services. Similar products and services offered by different companies will have different features and you should always read about product details before acquiring any financial product.
The material made available for you on this website is for informational purposes only and is not intended to provide legal, tax or financial advice. If you have questions, please consult your own professional legal, tax and financial advisors.
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