One notable financial document that all business owners should utilize is a balance sheet, which can be used to monitor your business’s financial health. Balance sheets are used internally to guide management decisions. Externally, they can be used to report your business’s financial status to lending institutions, investors, and other stakeholders. Also known as statements of financial position, balance sheets reveal what you own (your total assets). They also show what you owe (your total liabilities) at a specific point in time. The difference — shareholders equity — is your company’s net worth. Diligently tracking your company’s finances can help you identify potential issues before they turn into major problems. In fact, 29 percent of small businesses fail due to lack of cash flow. This is an issue that may be avoided through proper reporting. Ultimately, a balance sheet provides the financial information you need to sustain and grow your business over time. Creating a balance sheet doesn’t need to be complicated, and its benefits can be far-reaching. Without one in place, it may be challenging to manage your small business finances and make adjustments as needed. In this blog post, we’ll review three notable advantages of utilizing balance sheets so that your business can reap the benefits. After reading this helpful guide, you'll have a clear understanding of why utilizing a balance sheet can benefit your small business's finances, and why not having one can be detrimental. If you want access to more business blog posts like this one, click the link below to subscribe to our free newsletter:
What Are the Benefits of Balance Sheets?
1. Balance Sheets Determine Risk and ReturnA balance sheet succinctly lists your business’s assets and liabilities in one place. Current and long-term assets reflect your ability to generate cash and sustain business operations. In comparison, short and long-term debts prioritize your business’s financial obligations. Ideally, you should have more assets on your balance sheet than long term liabilities, indicating positive net worth. Comparing your current assets to current liabilities determines whether your business can cover its short-term obligations. If your current liabilities exceed your cash balance, your business may require additional working capital from outside sources. However, a balance sheet can also show you when your debt levels aren’t sustainable. If you have too much debt on your balance sheet, you may default on debt payments or be forced to declare bankruptcy. By using your balance sheet to identify these serious financial issues, you can avoid long-term financial problems.
2. This Report Can Be Used to Secure Business Loans and Other Types of Working CapitalYour balance sheet allows people outside of your company to quickly understand its financial condition. Most business lenders require a balance sheet to determine:
- How secure the business’s financial health has been over time.
- If the business owner has strong credit history.
- If the business has a proven track record of repaying debts on-time.
3. Business Balance Sheets Provides Helpful RatiosRatios are often used in analyzing how a small business is performing in terms of aspects such as: