Most business owners don’t know the exact meaning of balance sheet. They don’t know the importance of balance sheet, irony is that they didn’t know how to read balance sheet.
Balance sheet is an important aspect of the business. it reveals the financial status of your company. How much your entity owns (assets) How much it owes (liabilities) How much amount invested in the business (equity).
The balance sheets provide the In depth details of your company current financial status like capital structure, gearing, liquidity condition, cash availability, asset creation and other company investments.
Based on balance sheet you can determine your business net worth.Balance sheet can be used to monitor your business financial health.
Tracking your companies finances can help you to overcome major financial issues before they arrive.
In fact, 29 percent of small businesses fail due to lack of cash flow. This is an issue that maybe avoided through proper reporting.(means balance sheets)
What Are the Benefits of Balance Sheets?
1. Balance Sheets Determine Risk and Return
Balance sheets hold the capacity of keep your business alive by showcasing some important aspects of business like, assets and liabilities in one place.
Assets decide how much your business thrives in the market on the current and long term basis. if your balance sheet has more assets than liabilities, then it indicates that your business has positive net-worth.
If your current liabilities exceed your current cash balance then your business may need additional working capital from other sources.
If you have too much debt on your balance sheet, by default your business is forced to declare as a bankrupt.
By using a balance sheet you can avoid these serious long-term financial problems.
2. This Report Can Be Used to Secure Business Loans and Other Types of Working Capital
Somehow, If you required additional funds to expand your business, Most business lenders require a balance sheet to determine:
- How secure the business’s financial health has been over time.
- If the business owner has a strong credit history.
- If the business has a proven track record of repaying debts on-time.
Why?
If you apply for a small business loan, having a balance sheet will prove to lenders that you can repay your loan on-time.
3. Business Balance Sheets Provides Helpful Ratios
Ratios are often used in analyzing how a small business is performing in terms of aspects such as:
- Productivity
- Liquidity
- Profitability
- Solvency
These ratios will decide the sustainability of business.
Balance sheets help to determine overall financial health.