Keeping up with financial reporting and bookkeeping can be hectic for small businesses. They often struggle with these activities as not all companies have the best accounting practices in place. A balance sheet can be an essential piece of financial information as it defines a company’s financial health and position. Monitoring the financial health of a small company is essential, and it helps the management in crucial business decisions. This post will uncover what is a balance sheet and why it is important for your small business. Keep scrolling this page to learn more!
What is a Balance Sheet?
A balance sheet is a financial statement that provides a snapshot of a company’s financial position at a specific point in time. It presents a summary of the company’s assets, liabilities, and shareholders’ equity, also known as owner’s equity.
Assets represent what the company owns or controls, including cash, accounts receivable, inventory, property, and equipment. Conversely, liabilities are the company’s debts and obligations, such as accounts payable, loans, and accrued expenses. Shareholders’ equity is the residual interest in the company’s assets after deducting liabilities.
The balance sheet follows the fundamental accounting equation: assets equal liabilities plus shareholders’ equity. This equation ensures that the balance sheet remains in balance, hence the name.
The balance sheet provides valuable information about a company’s financial health, liquidity, and solvency. It helps investors, creditors, and other stakeholders assess the company’s ability to meet its financial obligations and its overall financial stability. By analyzing the components of the balance sheet, one can gain insights into a company’s asset composition, debt levels, and the extent of its financing through equity.
It’s important to note that the balance sheet represents a specific point in time and should be considered alongside other financial statements, such as the income and cash flow statements, to comprehensively understand a company’s financial performance and position.
Importance of Balance Sheet for a Small Business:
Business owners and managers are always interested in knowing the exact financial picture of a company. A balance sheet of all the financial statements, like income and cash flow statements, reveals the true financial health. It contains a company’s liabilities, total assets, and the status of how things are going. We have compiled a few reasons a balance sheet can be useful for your small business. Let us dive deep into the list to understand things further!
1. It helps you evaluate risk and return:
If you are associated with the financial industry, you will often come across the term “risk and return.” Why is it so important for your small company? Well, here is the explanation! Why should you invest your funds in a project? Is it worth the investment? A balance sheet analysis can help you with this decision as this paper enlists all your assets and liabilities and shows your company’s financial position.
If the assets on the balance sheet are more than your liabilities, your company is in an ideal financial position. However, if your current liabilities exceed your cash assets, your management must consider more working capital from investors and lenders.
2. It helps in securing loans:
A good balance sheet can help secure loans and investors for expanding your company. Investors and lenders are always interested in assessing your balance sheet, as nothing reflects the financial image better than this paper. When you approach a lender for funds, they ask for your balance sheet.
A balance sheet is a good tool for reflecting the creditworthiness of your business. A lender will only grant you funds if he can assess that you can repay the funds. Do you want to enhance your company’s financial health? Consider hiring the best accounting and bookkeeping services in Dubai to take your financial reporting to the next level!
3. Helps in long-term corporate decisions:
Despite running a small business, you often need to make bold corporate decisions to keep things in line. Nothing can be more helpful than a balance sheet when making long-term business decisions. It helps you track critical financial issues and identify risks before they create serious consequences.
If your balance sheets are accurate and up-to-date, you can avoid stepping into long-term business problems. Most small business owners often neglect the significance of budgeting and overspend on startup costs. Why not keep an eye on your balance sheet to assess your financial position and make wise business decisions?
4. Balance sheet analysis prevents potential issues:
Your small business might run into serious problems, and the reasons are mostly unknown. Looking at your assets and liabilities can help you figure out where and how to solve the problem. Since the primary objective of your small business is to make profits, you can analyze your balance sheet if things aren’t working well.
Your business might have less liquid inventory and not sell quickly. What if the inventory remains unsold for more than a year? It becomes a liability, and your balance sheet will tell you about it.
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5. It helps you in tax preparation:
Accurate accounting and bookkeeping will help you prepare for tax obligations. Not being compliant with the tax standards can cause serious issues for your small business, and your financial statements – especially the balance sheet – can have a crucial role. IRS has advised that small businesses keep accurate financial statements to prepare for tax obligations.
With accurate financial statements, your accountant will ensure you pay the right amount of tax. Moreover, if an external auditor knocks on your door for inspection, you must stay ready for the test. If you can provide a complete set of accurate financial statements, no one will blame your business name!
Get the Best Accounting Expertise for Your Business!
Accounting and bookkeeping can take your business to the next level should you hire the right persons/companies. Since financial statements and recordkeeping are essential on various corporate fronts, you must never ignore the significant part. Consider hiring the best accounting and bookkeeping experts to take your business to new heights and generate more sales!
Learn more about the common causes of an unbalanced balance sheet.