Regardless of how new your business might be, the chances are that you have some problems when it comes to getting the financial paperwork arranged and completed and a month by month basis. After all, it’s no wonder that most companies prefer outsource their bookkeeping and accounting tasks to professionals.
One particularly complex aspect to think about, is your monthly balance sheet. However, this financial document – alongside a range of other regular bookkeeping practices, can help you to learn more about your business, and therefore make confident steps towards better profitability.
Here we’ll cover what a balance sheet is, and how you can use it to help your company thrive.
What is a Balance Sheet?
First off, let’s get the definition out of the way. A balance sheet is one of the primary financial statements that most companies use to monitor their monetary health. Alongside your income statement and cash flow statement, your balance sheet forms an essential part of your business plan – providing a snapshot into your company’s financial position at any given time.
In a balance sheet, you will see both the things you own, (your assets) which include cash, inventory, equipment, vehicles, accounts, and buildings, as well as the things you owe (your liabilities), which might include accounts payable, material costs, taxes you owe and mortgages.
The difference between what you owe, and what you own is called your net worth, and it can offer a valuable insight into your company.
The Benefit of a Balance Sheet
While at first it may seem like just another aspect of accounting that you’d rather not deal with, a balance sheet actually gives you an idea whether or not your business has the correct financial resources to expand, and manage the normal hurdles of spending and receiving cash. You can also use a balance sheet to figure out when you might need to start bolstering your cash reserves.
When it comes to running your business, your balance sheet offers an insight into where cash might need to be collected, where inventory should be managed, and where bills must be paid.
Using Balance Sheets to Manage your Business
In order to use your balance sheet for managing your business, you’ll first need to consider fixed and current assets. Current assets are those that can be converted into cash within the next twelve months, such as:
- Any cash you have in the bank
- Accounts receivable – or money that you are owed by customers
- Inventory – such as the products and materials you use to make and sell items for purchase
Alternatively, fixed assets are those that will be around for more than twelve months. This can include equipment, vehicles, and buildings – and you will need to keep track of these for both tax and insurance purposes.
Once you’ve considered your assets, it will be time to look at liability accounts. The first liabilities to consider are current liabilities, that are due within the next twelve months. These can include:
- Accounts payable – the money that you owe to vendors and suppliers
- Taxes – the amount that you have to pay to the government in order to keep your business running legally
- Loans and long term loans – if you have any loans wherein payments are due in the next twelve months, they are listed here. Similarly, long term months where payment is due in more than twelve months – such as mortgages – can be listed here too.
Once you’ve got all of that information, you can combine current liabilities and current assets to create a ratio of the assets divided by the liabilities. Your ratio should be greater than one – demonstrating that you can manage the expenses of running your business. If it isn’t – then you need to think more carefully about your budgetary options for the future.
Examining this information will either give you the peace of mind that you’re running your business with enough success to maintain a reasonable and profitable company, or determine that you need to make changes for the good of your profits, and future finances. Either way, it sets you on the right track towards running your business in a more effective manner.
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