The Importance Of An Up-To-Date Business Balance Sheet
Knowing your business’s current financial standing is crucial to guide management decisions, and developing future goals and the plans to achieve them. A balance sheet helps in this regard by portraying the company’s total assets, liabilities, and shareholder’s equity accounts.
Exercising diligence when it comes to tracking your company’s finances is always a must because apart from the benefits – doing so helps management spot potential issues and rectify them before they become major problems.
So, continue reading on below to understand how you can do up a business balance sheet and its various benefits.
How to create a business balance sheet
Developing a business balance sheet is a relatively simple task. All that’s required is to list down all of a business’s assets and liabilities (both short and long-term), and the shareholder’s equity in their respective sections.
Here’s a gist of what each relevant component means in a balance sheet:
Short-term and long-term assets
Short-term assets encompass all assets that are expected to be sold or converted to cash within a year. Some examples are trade accounts receivable, employee accounts receivable, and inventory.
In contrast, long-term assets comprise assets that either provide long-term value to your business or won’t be converted to cash within a year. Investments, equipment, and commercial spaces are only a few examples of these assets.
Liabilities, meanwhile, include all your financial obligations towards others, namely in the form of loans, wages, accounts payables, and the like. The due dates of each determine whether they fall in the short-term or long-term category.
Lastly, the final section of the balance sheet is for the shareholders’ equity. To find it, one must subtract and determine the difference between the totals of all assets and liabilities listed previously. In other words, shareholders’ equity is the amount the business owns after subtracting its obligations from its assets.
If you’d like to know more about the assets and liabilities of your business (along with how to classify them), it’s best to rely on professionals such as those from a small audit firm in Singapore for assistance.
Benefits of updating your business’s balance sheet
Aids in determining risks and returns
A balance sheet displays the risks and returns that your business faces at any given point in the form of its liabilities and assets. All of the business’s liabilities, whether short-term or long-term, outlines its priorities from immediate to those that are more distant. In contrast, assets reflect the business’s ability to generate cash through short-term assets and sustain its operations via long-term assets and investments.
Comparing assets on hand with pressing liabilities allows business owners to determine whether they can cover their immediate obligations and even help in planning for when long-term debts eventually become short-term. Additionally, the results of a balance sheet can also indicate if the business is running on losses due to a greater amount of liabilities. By knowing such key information, business owners can then plan and adjust towards achieving their future goals and rectify the business’s progress if it strays off-course.
Provides useful financial ratios
In a financial statement analysis, ratios play a significant role in indicating a business’s long term sustainability using variables such as operational efficiency, profitability, liquidity, and solvency.
These financial ratios can be determined from a business’s balance sheet and often in conjunction with other financial reports. Relevant parties, such as managers, investors, and lenders, can then use such ratios to critically assess and evaluate the business and compare it with competitors to detect vital financial trends.
Indispensable to securing loans and other capital
Knowledge of the business’s financial health isn’t useful only to business owners but also to third parties, specifically banks and investors.
A healthy and positive financial standing provides confidence to the former and acts as proof of creditworthiness, qualifying businesses to additional loans or credit. As for the latter, balance sheets allow them to perceive exactly where their investments will go as well as provide an idea of the returns that they can expect.
The necessity of keeping a small business’s balance sheet up-to-date is always important – it gives business owners a good picture of their current financial standing and prepares them for future decisions. If you haven’t updated your balance sheet recently, it’s advised to make an effort to do so sooner rather than later.
For any corporate need, you may have, such as creating a balance sheet for your startup business, don’t hesitate to contact OneStop Professional Services. We offer many services aimed at making your business easier to manage, such as accounting, financial outsourcing, auditing, and company secretary services.