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An up-to-date balance sheet is an absolute must-have in modern business. You can think of it as your compass, in the unforgiving seas of business ownership. It’s a single document which outlines the overall financial health of your company, essentially serving as a frame of your business’s financial standing within one file. That’s a lot of power for one report. Still - without the insight that balance sheets provide, business owners can end up making purchases without knowing how much money is really in the bank. A regularly-updated balance sheet hosts a list of benefits, and rather than doing it in-house, it may benefit your company to outsource those accounting duties to save valuable time. In other words - don’t feel lazy, just hire a bookkeeper.
What Is a Balance Sheet?
Among the many financial statements used to keep track of earnings and expenditures, the balance sheet is your north star. In fact, another label for it is “Statement of Financial Position,” which fittingly describes its importance in business accounting. The balance sheet is reflective of all of your company’s assets and debts by date. In other words, it details everything owned and owed by your company. Everything you have and whatever you owe is classified in terms of assets, liabilities, and equity. All of this data is vital in determining your current and forecasted financial stability, which makes it a key decision making tool. Most importantly though, it can be predictive of a business owner’s nightmare: bankruptcy. Keep your hand on the steering wheel and know your financial standing at all times. A common rule of thumb is, if the ratio of your company’s assets to liabilities (on their balance sheet) is less than 1:1, then bankruptcy is on the horizon. This is why it’s suggested to consistently check and update your balance sheets. Up-to-date knowledge results in better decision making, resulting in a healthier company over the long-term.
Why to Keep It Up-to-Date
Using and updating balance sheets will help with risk and return analysis, loan approval, and long-term sustainability. Firstly, the assets and liabilities listed on a balance sheet are telling of your revenue stream and whether you can remain operational. If there are more assets than liabilities, which displays a positive net worth, then congratulations - your financial future is bright. In this way, the balance sheet can tell you whether you’ll be capable of handling short-term financial obligations. This is done by comparing any current assets to liabilities. Additionally, taking notice of outstanding debts can be early warnings of defaulted payments and, as previously cautioned against, a bankrupt company. Secondly, obtaining business loans and securing outside capital is easier with a clean, up-to-date balance sheet. Lenders will typically look for specific signals when evaluating them, but the core insights that they focus on are: whether your business has remained financially stable over time, if it has a healthy record of debt repayment, and the strength of its credit history. Just keep your balance sheets updated to prove that your company is financially responsible. It may feel like busy work, but it’ll serve you well in the long run. Lastly, the information on a balance sheet holds enough insight to determine how sustainable a business will be over time. This is calculated by financial ratios, which measure things like liquidity, solvency, productivity, and profitability. Other details, such as how long an accounts receivable process takes, can be determined by a balance sheet as well. Along with outlining your company’s sustainability, this document can be leveraged to identify any new or undesired operational trends. As you can see, the balance sheet could write a novel about your business’s financials. You don’t want to make any typos, or incorrectly fill out any forms - which is why business accounting is best left to certified specialists. Understanding each and every item on a balance sheet can prove difficult without professional help, so it’s suggested that business owners hire a bookkeeper to analyze and update their balance sheet.
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