The balance sheet, also known as the statement of financial position, is one of the most important financial documents in any business. This document shows the business’s financial position as of the stated date. It does this by displaying the company’s information in terms of assets (what the business owns), liabilities (what the business owes), and equity (the business’ net worth).

If you own or manage a business and wonder why you always have to prepare and analyze a balance sheet, you’re in the right place. In this article, we’ll discuss the primary importance of the balance sheet in business.

1. Helps you know your business’s financial standing

A balance sheet lists assets and liabilities in one place, making it easy for you to make comparisons and informed financial decisions.

The current and fixed assets show the ability of a business to generate cash and finance its operations. On the other hand, short and long-term liabilities provide an overview of the business’s financial obligations.

Ideally, your business should have more assets than liabilities in order to operate on positive net worth. However, if your liabilities exceed what the business owns, it may be a sign that you need an additional working capital injection, or you’ll be declared bankrupt.

By knowing your business’s financial standing, you can then make informed decisions regarding investments and everyday operations.

2. Helps in securing additional capital from lenders and investors

When seeking additional capital from investors and lenders, your balance sheet, among other financial documents, determines their final decisions.

Lenders will analyze your balance sheet to determine your company’s financial status and creditworthiness.

Investors will also use the balance sheet to look at what kind of a business they are investing in, how safe their funds will be, and when they expect to gain returns on their investment.

If your balance sheet portrays a good image of your business, it will be easy to secure additional funding.

3. Provides helpful financial ratios

Financial ratios are an important aspect of any business derived by analyzing the various items listed on the balance sheet. These ratios indicate a company’s operational efficiency, profitability, liquidity, and solvency.

Financial ratios help determine how sustainable a business is. They clearly show the business’s capital structure, inventory cycle, performance against competitors, etc.

Typically, financial ratios offer more relevant information that’s easier for the shareholders, investors, and other concerned parties to understand than raw data.

4. Helps in making long-term financial decisions

By analyzing the balance sheet, you can see where your business stands and what you need to do to improve the general performance and profitability.

This means you can identify issues early on before they graduate into bigger problems. For example, you can make better decisions on how to manage debts before your business gets to the point of bankruptcy.

5. Helps identify business trends

The balance sheet can also help you identify trends in your business over a period of time and implement strategies to improve your operations. For example, you can determine your relationship with customers and suppliers and how it affects your business.

Bottom Line

Preparing, maintaining, and analyzing a balance sheet is important for every business, whether big or small. And since the balance sheet numbers change with every single transaction, it’s important to keep updating it regularly to get the real picture of your business.

If you need help with your balance sheet, contact me to see the value I can bring to your business.