What Are Balance Sheets & Why Are They A Business Requirement?

by Sachin

Every business owner has many things to keep track of every day. From managing employees to keeping tabs on your supply chain, the work never seems to end. When it comes to managing all of this and ensuring that your business has a secure future, one of the most important of these tasks is ensuring your balance sheet is in order.

Balance sheets are essential for managing and understanding the financial health of your business. However, many business owners neglect to consult their balance sheets on a routine basis. You may be familiar with the concept, but as a new business owner or entrepreneur, you need to consider how important a business statement is.

Let’s look at some of the basics of balance sheets and some of the specific reasons why they are a business requirement.

Balance Sheet Basics

Balance sheets typically have a structure that is outlined in international or national accounting standards. This structure helps entrepreneurs categorise and organise the different financial components of their business in one coherent document. If you have never been exposed to the topic of balance sheets before, then it is a good idea to consult with a professional accountant who can give you some guidance.

Balance sheets include outlines of two sets of figures that are critical to the financial health of your business: assets and liabilities. Assets are the items in your business that you own, and that can provide you with some kind of economic benefit. Liabilities are items that you owe to other parties.

When your assets outweigh your liabilities, your business is likely in good financial shape. When you have too many liabilities, or when the balance between your assets and liabilities is tilted too far in the direction of the latter, your business may be close to bankruptcy.

Assets And Liabilities

It helps to have a general sense of what items can be found in your assets and liabilities. Assets can include cash, business investments, your inventory, any equipment or buildings that your business owns, or other property that has been paid for by your business. Liabilities refer to various forms of debt your business might acquire. This can include bank loans, any wages owed, taxes, or outstanding mortgages.

Why Are Balance Sheets Important?

Balance sheets are important for a variety of stakeholders in your business for a variety of reasons. Most prominently, balance sheets give you and your investors a better sense of how your business is doing financially. By taking a close look at the balance sheet, you can see how your assets weigh up against your liabilities. This can let you know whether you are on solid financial ground or if you need to make immediate changes before your business starts to head in the wrong direction.

Balance sheets are a business requirement because they give your investors an accurate account of the financial health of your business. Beyond the help that they can provide to you when making financial decisions, balance sheets showcase how your business is doing well, or not, to people who want to join in and take an equity position with your company.

The Bird’s Eye View Of Balance Sheets

Your balance sheet provides you with an essential objective view of the financial health of your business. Keeping it up to date and regularly consulting with it will keep you abreast of any potential problems your business is facing. The sooner you can sort out imbalances in your balance sheet, the better the long term health of your business will be.

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