The Importance of Your Balance Sheet: 5 Advantages of Keeping it Up-to-date
- Written by NewsServices.com
For many business owners, keeping up with bookkeeping and financial reporting is the most formidable challenge. Success requires the preparation and knowledge of your company's financial accounts.
Your balance sheet informs you and other interested parties about your financial condition. Ensuring this data is consistently updated will enhance your efficiency, ability to borrow money, and financial stability while also assisting you in making more intelligent business decisions.
What is a Balance Sheet?
A balance sheet is a summary of your business assets and liabilities. It can show the money you would have left if you sold all your assets and paid off all your debts.
What's in a Balance Sheet?
Assets = Liabilities + Equity.
Simply put, it's what you own versus what you owe.
Let's define the terms.
Assets - any resource a business owns or controls that helps a business make money through sales and income. This also refers to any resource that could be sold for money.
Liabilities - any obligations your business owes to others, including bank loans, mortgages, unpaid invoices, and other sums of money. A liability exists when you owe someone money after promising to pay them in the future.
Equity - the difference between assets and liabilities. By subtracting liabilities from assets, Equity reflects the actual value of a business.
The balance sheet is deemed "unbalanced" if total assets do not match liabilities and Equity.
5 Advantages of Updated Balance Sheets
Balance sheets are essential for several reasons. They reflect essential financial data that are used in the course of business transactions. Some typical uses for balance sheets include:
1. Preparation and Readiness
For both tax preparation and planning, keeping precise company records is crucial. To complete correct tax returns, business owners should possess financial records that are organised and up-to-date.
This enables your accountant to prepare your business returns and also ensures you aren't paying more taxes than necessary. You will be obliged to provide a complete set of financial records, including financial statements and receipts, for inspection in the case of an audit.
2. Business Planning
By monitoring your company's finances, you may see possible problems before they grow or multiply. Most small businesses fail due to cash flow issues that, with accurate and current balance sheets, may be detected early and resolved.
Business owners frequently undervalue the value of budgeting, overpay on beginning expenditures, and put off applying for finance for too long. These typical financial issues may be avoided by developing a solid business strategy and using financial statements to inform business choices.
3. Risks and Profitability
Your company's assets and liabilities are listed on a balance sheet.
Your current and long-term assets reflect your capacity to earn and maintain operations. Your financial commitments are prioritised by your short- and long-term debts.
A positive net worth is indicated by having more assets than obligations. Lenders or investors will likely need to provide extra working capital if your company's current liabilities are more than its cash balance.
4. Loans and Investors
Looking at your balance sheet lets others easily understand your company's financial status.
Most lenders require a balance sheet to evaluate a business's financial condition and creditworthiness. Applying for a loan demonstrates to lenders that you are likely to make your payments on time.
Potential investors use balance sheets to assess where their funds will go and when they anticipate receiving a return.
5. Problem Prevention
Making a profit is a business's primary goal. Therefore, a well-run enterprise should display growing Equity.
If your company isn't accomplishing that, you may determine why by looking at certain assets and liabilities on your balance sheet.
Needless risk may be involved if inventory makes up most of your assets. Unsold inventory can quickly turn into a huge problem.
Get the Accounting Expertise That’s Fit for Your Business
Trying to manage your company's accounting chores alone is not the most excellent use of your time unless you're a finance expert. Outsourcing your bookkeeping and accounting is a wise move, regardless of your level of expertise as a business owner.
A reputable accounting company will have the knowledge and tools necessary to ensure that your accounts are in order and can aid in your understanding of your financial statements and their application in enhancing the performance of your company.
Target Accounting is your team of local accountants and business advisors specialising in providing all accounting, taxation, business consultancy, financial and advisory services to clients across New Zealand. We get results by focusing on strong and lasting relationships with our clients – by understanding their business and financial goals to help them reach their full potential.