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Article | 4-minute read
Use a balance sheet to keep a handle on your business’ finances
No matter what stage you’re at with your business, it’s important to consider your business’ balance sheet movements. By regularly forecasting your business’ balance sheet, you will have a clearer understanding of what you’re likely to own or owe by a certain date. This allows you to plan for immediate and future business decisions.
Why use a balance sheet?
Here are some reasons why it’s important to keep a handle on your business finances:
- Banks use a balance sheet as a tool to help them assess your capacity to repay your loan. A balance sheet provides them with visibility of your business’ current financial position, including your current assets and liabilities, to see if your business is in a good position to borrow more funds.
- Put your best financial foot forward when expanding, securing lending or growing your business. If you combine an updated balance sheet with your latest revenue and cash flow statements, the combination provides a detailed analysis of your company’s financial health.
- Make an impression with potential investors. Showing your current assets, liabilities and financial position to potential investors means they can use this information to consider the future growth potential of your business.
- A great management tool. A balance sheet is important purpose for the management of a business. Kept updated, it can help identify any existing issues as well as anticipate future problems, allowing you to create a necessary plan. For example, a business owner can check their current debt position and compare it with the industry benchmark to see where they could make some changes.
We’ve covered why, now how to use it
By filling out your balance sheet, you can better understand what you own or owe at a specific date, allowing you to plan for future business decisions.
What’s a balance sheet?
A balance sheet is a snapshot of everything that the business owns and owes at a particular point in time. It includes:
- Assets: Everything that the business owns (i.e. a resource used to make money in your business).
- Liabilities: Everything that the company owes to third parties, such as banks, suppliers or employees (i.e. debts owed to other people).
- Equity: Everything that the business owes to the owners of the business (i.e. ownership in a business or the owner’s investment in the business).
In a balance sheet, the total assets should equal the total liabilities and equity. When you’re making projections, it’s important that the balance sheet equals in this way.
If your sheet isn’t balanced, it usually means that you’ve missed something or there’s an error.
To help you get started we’ve created a balance sheet template.
Next steps
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