Why Is a Balance Sheet Important? 3 Things You Need to Know

Creating and regularly updating a balance sheet for your business is important for understanding the financial state of your company, which is why it’s also sometimes referred to as a “statement of financial position”. It compares your company’s assets with its liabilities and shareholder equity to determine the financial health of your company.

You probably started your business to help people, but you’re also in business to make money. Creating a financial statement for your business is a great way, not only to check that you are currently making money in your business, but that you will continue to do so, and hopefully grow your business. It’s important to check your balance sheet every once in a while for your own purposes, but there are also specific instances in which you’ll need to provide a balance sheet to prove to others the financial viability of your company. Here are some of the situations in which you’ll find having a balance sheet is important.

Making Business Decisions
When you know the financial state of your company, you’re in a better position to make decisions that are more likely to benefit the company. Do you know the debt/asset ratio of your company? How does that affect your company’s ability to achieve big goals? Can you leverage assets to go after a major initiative, or is it time to pull back for a while and focus on paying down debt?
You need to be able to see your assets and liabilities side by side in order to know the overall financial wellbeing of your company. Only then can you make the best financial decisions.

Getting Investors
If you’re looking for investors to inject some capital into your business, they’re going to need to see a balance sheet before deciding whether your company is worth the risk. They might love and believe in your company, but at the end of the day, they’re in it to make money, and you’ll need to provide a financial statement to prove they’re likely to see a return on their investment.

Getting a Business Loan
Banks often have a lot of capital to invest in small businesses, but like investors, they’re ultimately in it to make more money for the bank in the form of the interest you’ll pay on that loan. If you can’t pay back the loan, the bank will have lost money, and that will be bad news for their bottom line. To make sure that doesn’t happen, the bank is going to want to see a balance sheet to determine the likelihood you’ll be able to pay back the loan, as well as the liquidity situation of your company to see what limits exist on your ability to draw on your capital if you should need to do so in order to repay the loan.

Whether you need help creating a balance sheet for your business or analyzing the information provided on your balance sheet so you can make better business decisions, we can help. Let the Bookkeeping Doctor help you identify the assets and liabilities so you can identify the right strategy for growing your company to the next level.