A balance sheet is one of the main financial statements that you can use for your business. It is a report that can provide you with information on the overall financial status of your business at a particular point in time. Understanding what a balance sheet portrays about your business can help you establish and reach your financial goals. A balance sheet includes several elements that can help you and others understand how your business is doing financially.
- Current Assets
One of the primary categories of a balance sheet is the company assets. An asset is basically anything that a business owns. Examples of assets include cash, inventory, buildings, equipment, and accounts receivable.
- Current Liabilities
Another important category on a balance sheet is the company’s current liabilities. A liability is any financial obligation of the company. Examples of liabilities include accounts payable, salaries payable, and income taxes. Liabilities also include any money the company may owe to creditors such as a supplier or lending institution.
- Owner’s Equity
The owner’s equity is often reported as a part of the balance sheet. You can calculate the owner’s equity by subtracting current liabilities from current assets. For example, if you paid all of your liabilities and cashed out all your assets, the equity is what you would have left. Calculating this number can give you an idea of how much margin you have in the business.
- Credit Worthiness
Lending institutions can use a balance sheet to help them determine the credit worthiness your company. Lenders can gain an understanding about whether you can afford additional credit because the balance sheet includes all of the assets and liabilities of the business. It is a good statement to have on hand if you plan on applying for additional credit.
- Overall Financial Wellbeing
In addition to lending institutions, there are other people and institutions that may want to look at your balance sheet for various reasons. You, as the owner, and other management in the company can use the balance sheet to keep up with the financial status of the business. Current investors can look at your balance sheet to check on how the company, and their investment, is doing. Potential investors can use your balance sheet to help them decide if your business is a worthwhile investment. Suppliers may look at your balance sheet to insure that you can continue paying for any supplies they deliver before payment is received. Others that may take an interest in your balance sheet include government agencies and labor unions. If a person or institutions has an interest in the overall financial wellbeing of your company, a balance sheet is one of the most informative financial statements you can provide.