Understanding Your Financial Reports Part 2

The Balance Sheet

A Balance Sheet is a snapshot of a business’ financial condition at a specific moment in time, usually at the close of an accounting period. A Balance Sheet comprises assets, liabilities, and owners’ or shareholders’ equity. Assets and liabilities are divided into short and long-term obligations including cash accounts such as banks, money market, or stock securities and bonds.

It’s called a Balance Sheet because the two sides balance out. This makes sense: a company has to pay for all the things it has (assets) by either borrowing money (liabilities) or getting it from shareholders (shareholders’ equity).

What is the Balance Sheet used for?

A Balance Sheet helps a small business owner quickly get a handle on the financial strength and capabilities of the business.

  • Is the business in a position to expand?
  • Canthe business easily handle the normal financial ebbs and flows of revenues      and expenses?
  • Or should the business take immediate steps to bolster cash reserves? It can identify and analyze trends, particularly in the area of receivables and      payables.
  • Is the receivables cycle lengthening?
  • Can receivables be collected more aggressively?
  • Is some debt non-collectable?
  • Has the business been slowing down payables to forestall an inevitable cash      shortage?

Balance sheets, along with Profit & Loss (Income Statements), are the most basic elements in providing financial reporting to potential lenders such as banks, investors, and vendors who are considering how much credit to grant the company.

Why is the Balance Sheet important?

It is clear then why the Balance Sheet must have accurate information. Without it you are running your business with a blindfold on.

Concentrating solely on the Profit & Loss is a mistake which can contribute to a business failing. It also leaves too many questions in your minds. One of the most common questions is – why don’t I have any cash in the bank but I made a profit this month?

Cash flow can be a huge problem for growing businesses. By examining the Balance Sheet you will be able to see how “healthy” the business is. It answers the question “where has my money gone?” and it shows if the business is adequately funded.

TAP Bookkeeping provides high quality bookkeeping services to help business owners make better financial decisions. Contact us for a free consultation to explore how we can help you.