We know how much of a struggle it can be to keep up with financial reporting and statement preparation. There are so many more pressing things you’d rather be doing. Things that will actually bring in revenue for your business! Regular financial statement preparation, however, is vital in order to give your business a strong foundation to make informed decisions, get financing if needed, and continue to grow.
As a part of your financial statement prep, the balance sheet is one of the most important pieces you should regularly create. It shows detailed information about your assets versus liabilities. You should be doing everything in your power to keep it up-to-date. If you haven’t updated your balance sheet lately, make an effort to do so sooner rather than later.
What Do Balance Sheets Do?
The balance sheet shows you what the financial condition of your company is. What do you owe to vendors and suppliers? How much are you expecting from customer invoices in the foreseeable future? Do you know what the balances are for different accounts in your business? Things such as cash, accounts receivable, inventory, accounts payable and loans payable?
These are all things you need to know on a real-time basis in order to make informed decisions.
Data on the balance sheet is also used to calculate a company’s overall health. It can show your liquidity, solvency, valuation and more. These are all things that investors and lenders (and you, as the business owner!), need to be kept informed of. But the only way these ratios are going to be informative is if you have the most current numbers available in your balance sheet.
Why do Balance Sheets Need to Stay Current?
There are some key reasons why it’s so important to have up-to-date balance sheets.
1. Preparation and Readiness
Did you know you can reduce your tax bill by keeping your balance sheet current during the year? It is easy to forget expenses like chargebacks, utility bills, office supplies, and ACH payments. However, you can increase your chances of getting every qualified business deduction you deserve. Reduce your taxable income by prioritizing a balance sheet.
You have a better chance of taking advantage of bonus deductions or you could potentially switch up your accounting method. However, you won’t be able to make these important decisions without an up-to-date balance sheet.
If you’re audited, you will also need to provide a complete set of financial records, as well.
2. Business Planning
If you are monitoring your company’s finances through balance sheet line items, you are more likely to see potential problems before they grow and cause your business to fail. Cash flow issues are a main component of failing businesses. But with accurate and current balance sheets, you may be able to detect issues early and fix them before they get out of hand.
A main goal of any business is to make a profit. Therefore, your balance sheet should show you how your equity is growing. If your business isn’t accomplishing that, this would be the perfect time to see what assets and liabilities are causing a drain on equity. For example, you may be carrying too much inventory, which makes up most of your assets and can be a needless risk.
3. Loans and Investors
If you are going to apply for a loan or are looking for an investor to join your business, they are going to require a balance sheet to evaluate your financial condition. This will help them understand the company’s financial status and will help potential investors see where their funds will more than likely be going.
They will also be able to look at current and long-term assets, which reflect your company’s ability to earn and maintain operations. Financial commitments, like short and long-term debts, are important to see if a potential investor or credit provider will have a hard time getting paid back. If your company’s liabilities are more than your cash balance, this is when lenders or investors may need to provide extra working capital, which they may see as a big risk.
In short, someone looking at a balance sheet can easily assess the following:
- Whether a company has overextended, such as whether it has borrowed too much money.
- Whether the company has enough liquid assets to pay off its debts in the event of liquidation.
- If the company has enough cash on hand to meet current debt obligations.
4. Long-Term Growth
Scaling a business requires hard work, strategy, and transparency in how you are operating. For example, you may need a lot of cash to buy new equipment, hire more employees, or expand into new markets, all of which signal long-term growth. But, you won’t be able to make informed decisions about this growth if you aren’t tracking the cash, accounts receivables and upcoming obligations your business has. Clearly understanding your business operations through a balance sheet is essential to plan for effective long-term growth.
While managing your company’s financial statements, including the balance sheet, may not be the most excellent use of your time, you can outsource to a reputable firm like Knecht Business Solutions. We can provide the knowledge and tools necessary to ensure your accounts are in order. For many business owners, keeping up with bookkeeping and financial reporting is the most formidable challenge. Success requires the preparation and knowledge of your company’s financial accounts, which is exactly what we can do!