All about balance sheets

Hi everyone! I am the Accounting Manager here at Total Solutions and I want to tell you all about balance sheets. Business owners often want to just focus on having an accurate income statement, but they need to pay attention to their balance sheet too…

What is the balance sheet?

A company’s balance sheet shows what the company owns (which is defined as assets) and what the company owes (also known as liabilities), as well as how much both the owner and shareholders have invested (which is known as equity).

A balance sheet also gives you an indication of what the company’s net worth is. To determine what your company’s net worth is, you subtract your liabilities from your assets.

It helps you understand how much money your business would have left over if you sold its assets and paid off its debts.

What is the balance sheet for?
1. To Evaluate Risk and Return

A balance sheet lists all of your business assets and liabilities in one place. Current and long-term assets reflect your ability to generate cash and sustain operations. Short and long-term debts prioritize your financial obligations.

2. To Secure Loans and Investors

Your balance sheet allows people to quickly understand the financial condition of your business

Most lenders require a balance sheet to determine a business’s financial condition and creditworthiness. If you apply for a loan, your financial statements can help demonstrate to lenders that you are likely to repay your debts in a timely manner.

3. Spot Trouble Ahead

Tracking your business finances can help you identify potential; issues before they become major problems. Most small businesses fail because of cash flow problems that can be identified early and corrected if balance sheets are accurate and up-to-date.

The primary reason for a business is to make a profit. A well-run business should show increasing equity. If your business isn’t doing that, looking at specific assets and liabilities on your balance sheet can help you figure out why.

4. To Make Tax Preparations Easier

Keeping accurate business records is important for both tax planning and preparation.

The IRS recommends that small business owners maintain organized and up-to-date financial records in order to prepare accurate tax returns. With your financial statements in order, your accountant or tax preparer will be able to accurately prepare your returns and ensure that you are not paying more taxes than you should. In the event of an IRS audit, you will be required to present a complete set of financial records for inspection, including financial statements (income statement and balance sheet) and receipts.

So when your accountant wants to talk balance sheet… LISTEN!

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