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.
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.
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 cashflow
While your balance sheet does not show your cashflow specifically, it does work very closely alongside your cashflow forecasts, which is another reason to keep your balance sheet current. Your cashflow will help you to understand what is coming into or going out of your business at any time. An accurate cashflow 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 cashflow is essential to running your business effectively, but without a clear and structured balance sheet with all liabilities outlined, your cashflow 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.
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