The Importance Of Having An Up-To-Date Business Balance Sheet

The balance sheet forms part of the financial statement and help demonstrate what a company owns at any particular time and show important information about a company’s assets, liabilities and the shareholder’s equity. It is therefore vital that all businesses have a balance sheet that is accurate. Here are just some of the reasons why it is important to have an up to date business balance sheet.

What are the components of a balance sheet?

Balance sheets use the following formula:

Assets = liabilities + shareholders’ equity

Assets

There are two main types of assets; current and non-current. Current assets are items that the business has acquired over time that will be used or converted into cash within one year of the date on the balance sheet. Temporary investments, cash, stock, trade debtors, work in progress and prepayments (ie insurances) are all classed as current assets.

Non-current assets include fixed assets that are long term investments. These can include plant equipment, motor expenses or larger investments such as property, land, or a long-term investment.

Liabilities

There are also current and non-current liabilties. Current liabilities are payments which the company needs to pay within a year of the balance sheet date. These could be salaries, overdraft payments, taxes or hire purchase.

Non-current liabilities are for those payments which are not due for more than a year, such as bank loans or interest.

Equity

Finally, there is equity which is made up of share capital, which is the amount each shareholder initially paid for their stock, and retained earnings, which is the businesses profits to date that has been reinvested into the business.

Why businesses should have an up-to-date balance sheet

Highlights risk and return 

Running a business can be a balancing act, and business owners need a way of knowing whether the business is financially viable and where the potential risks are. A balance sheet details a business’ assets and its liabilities all in one place. From this you can see what short and long-term debt you have and can use this information to make business decisions. For example, it can help highlight whether the debt you have is sustainable.

Comparing assets with liabilities allows business owners to determine whether they can cover their immediate obligations which can help you to plan for when long-term debts become short-term and more urgent. With this initial information, business owners can adjust their business plan to ensure they are in a better position down the line and remain on track to reach their business goals.

Help gain investment and funding

Your balance sheet is a key business tool, not least because it can be used to show people outside your business the financial state of your company. Banks and other lenders can look at a balance sheet to identify how protected the business’ financial wellbeing is, if the business owner has a good credit record, and whether the business has an established track history of settling debts on time. It also demonstrates to lenders that a business has a history of managing assets and liability reliability.

Help calculate other financial figures and ratios

There are some key business ratios that can be calculated using a balance sheet, including output, liquidity, profitability and solvency. These financial ratios can effectively be used to evaluate how sustainable the business will be long-term, or whether measures need to be taken soon.

Is there any business that doesn’t need a business balance sheet?

There is not a legal requirement for all businesses to prepare a balance sheet (it is only a legal requirement for publicly trading companies) and, whilst we have explained the importance and benefits of balance sheets, they may not be suitable for very small businesses as it might not be cost-effective.

Whilst balance sheets are not compulsory for all businesses, companies of all sizes can reap the benefits of having one. Understanding your company’s finances is a key part of being a business owner, and balance sheets are very useful in helping you do this, by providing you with a clear overview of your business. When kept up to date, they can be an effective tool to help your business grow and meet its goals. If you need any help with balance sheets or financial planning for your business, then please contact a member of the Wright Vigar team.