The forgotten statement.. yes it is true there is a forgotten financial statement… the Balance Sheet. Everyone loves their Income Statement but no one ever looks at their Balance Sheet. Is it because you don’t think the information on it is important? Is it because you don’t understand it? Is it because it doesn’t tell you how much money you made? Is it because it doesn’t tell you how much money you spent? Or is it a combination of all of the above? Take a moment…think about it – did you answer yes to any of the questions?
If yes this blog is for you!!
A Balance Sheet has a wealth of information that should never be overlooked or dismissed! By passing it up you are missing out on so much that can help drive your business forward. So by now you may be asking – what is a Balance Sheet and why is it so important to you? A Balance Sheet by definition is a statement of assets, liabilities and owners’ equity for a specific point in time. Now if you haven’t looked at a Balance Sheet lately that may not mean anything to you – but it should!
What Is It
Let’s say that again:
statement of assets, liabilities and owners’ equity
statement of what the company owns, owes and amount invested by the shareholders
Your assets range from how much money you have in your bank accounts to how much people owe you in Accounts Receivables. Your liabilities range from how much you owe vendors in Accounts Payables to how much you have outstanding in loans. Your owners’ equity tells you how much your shareholders have invested in the business.
When looking at your chart of accounts you can immediately tell what accounts will be on your Balance Sheet if they are an asset, liability or equity. Which is why as stated in my blog Truth and Consequences for Financials it is critical to pick the proper account types when creating accounts in your chart of accounts. Improper use of account types can skew the numbers on both your Income Statement and Balance Sheet.
Why Is It Important
Need extra funds to grow your business? Thinking of selling your business? Or do you just want to know what your business is worth? There are very specific ratios that are used to calculate the liquidity and worth of your business – they are all based off of your Balance Sheet!
But that is skipping ahead a bit. We should first answer why is it important – very simply put it tells you the overall health of your company.
- Checking account – how much money do you have to pay your bills and payroll
- Savings account – how much do you have to be able to utilize if needed
- Accounts Receivables – how much have you extended in credit to others
- Accounts Payables – how much you owe others
- Long Term Loans – how much you owe others due in a period longer than one year
- Short Term Loans – how much you owe others due in a period of one year
- Accrued Expenses – how much you owe others (if using accrual basis accounting)
- Stockholders Equity – how much stockholders have invested in the business
Above is a simplified list but provides an idea of what information is available on your Balance Sheet. All of which are critical to make informed financial decisions to sustain and grow your business. Your Balance Sheet is not something that should be dismissed or disregarded.
Applied Management Group can assist in creating your chart of accounts that supports a corrected Balance Sheet to be utilized in the advancement and development of your business.
The SmallBizRising Blog is designed to be an educational content hub pulling information, best practices and practical advice for the small business owner and features topics including accounting, marketing, technology and more. Be sure to subscribe to stay up to date with new content as it is posted. The blog was created by The Neat Company and receives contributed content from a group of contributing companies that provide technology, services and solutions to small businesses.