What is a balance sheet?
With most of people’s attention being drawn to profit and loss reports and cash flow statements, the poor old balance sheet often gets over looked. It may not tell you exciting things like profit but it can provide some very useful insights.
So what is a balance sheet and why is it important?
The balance sheet is a snap shot of your business at a certain point; usually the last day of your financial year. It details all of your business assets and all of your business liabilities. Basically it shows you everything you own, have or is owed to you and in contrast, everything you owe and need to pay to other people.
If you are trying to obtain finance, the lenders will often look at your balance sheet. This is because they want to see that your total assets are greater than your liabilities. When this is the case, it demonstrates that if you needed to get hold of some cash you have money in the bank, customers to chase, stock and assets to sell to be able to generate it. When your liabilities are greater, this shows that you don’t have enough money in your business to pay your debts. Someone may be wary of giving you a loan if you don’t have the capacity to pay off the loans you already have.
Equally, the balance sheet gives you the chance to look at who owes you money. There is no point in generating £1million worth of sales if £999,999 of that looks unlikely to ever get paid. A debtor may be considered to be an asset, but if you know that your customers are poor or slow payers then that’s going to have a negative impact on the health of your business.
The same goes for your creditors. You might try to save a few pounds by delaying the payment of some stock, missing the odd PAYE payment or taking out another small loan to help with cash flow, but a high level of liabilities can highlight trouble ahead. Be aware that cash flow could prove an issue at some point, especially if someone demands their money earlier than expected.
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