If you run a business – what would be on top of your list? Profits, of course. But other than that, what leads to profits? Do you have one answer? I doubt you do. Because the truth is, there is no one single answer. There are several factors that lead to profits and successfully running a business. The list to this is never-ending.
It can start from your product and go all the way to market demand and management. While there are so many important factors, don’t you think there is one particular field you should be concentrating on, since it tells you if you are making profits or going on a loss. The balance sheet. If it sounds unfamiliar to you, don’t worry, we will start from scratch.
What is a Balance Sheet?
The balance sheet is one of the reports of a financial statement that gives the financial situation on a specific date. The balance sheet of an organisation has a wealth of information that can be used to assess financial stability and commercial performance. The balance sheet is a report version of the accounting equation, which states that the total of assets must always equal the total of liabilities plus shareholder’s capital.
Investors and creditors often examine the balance sheet to determine how efficiently an organization can utilize its resources and determine the worth of its investments.
The three most significant sections of any balance sheet are as follows:
Assets – A resource possessed by an entity that generates positive economic value.
Liabilities – This section contains a list of debts that an entity owes to others.
Capital – The investments by others.
Now you know the components, but you also must remember that assets and liabilities come off as the most crucial in a balance sheet.
What are the Benefits of a Balance Sheet?
Are you a business owner? Even if you aren’t, you must know that maintaining a balance sheet comes with a reward. Let’s look at the advantages of it.
- Loans and Investors
Your balance sheet is an ever-changing document into which you regularly enter new assets that you purchase or liabilities that your organisation incurs. When your balance sheet is updated on a regular basis, it provides potential lenders and investors with the information they need to make informed judgments about lending you money or other resources.
It displays your company’s assets, liabilities, and net worth, and when compared to previous editions, it even reflects your company’s capacity to collect and pay debts over time. This is critical for investors because your balance sheet reveals whether or not you will be able to repay investors.
Balance items or data are required to construct various financial ratios such as the liquidity ratio, current ratio, and acid-test ratio. Financial ratios aid in determining a company’s profitability, liquidity, and long-term viability.
- Sheet of Analysis
Your balance sheet organises your current liabilities, including short-term debt in the form of accounts payable, which is goods or services purchased from other businesses, and your accumulated expenses. These are items that will be due shortly, such as employee wages or taxes.
Your balance sheet also includes information on your long-term debt, such as loans. You can compare these data and accounts to the assets you hold as a business owner. These frequently include cash, land, prepaid accounts, inventory, equipment, and accounts receivable, which are items or services given to customers that have yet to be paid for.
Looking at these items can help you identify which liabilities should be addressed first and which assets should be changed or collected to improve your company’s cash flow.
- Decision-Making Partner
The balance sheet allows you to compare the company’s current financial situation to the prior period’s financial situation. As a result – present progress can be determined, and future plans and decisions may be properly made.
- Asset and Liability Data
The balance sheet summarises the most recent financial characteristics of the company. It gives detailed information about trade debtors and trade creditors at a specific time.
How to Create a Balance Sheet?
If you are just a beginner, it is not very simple – breaking the ice to you. At the same time, it isn’t hard to learn.
- Decide Date
A balance sheet summarises your company’s assets, liabilities, and shareholders’ equity on a specific day of the year or during a particular time. The majority of companies issue quarterly reports on the last day of March, June, September, and December. Businesses may also choose to prepare monthly balance sheets, in which case they would report on the last day of each month.
- List Assets
Following the establishment of the date, the next step is to break all of your existing asset items into discrete line items. It is desirable to arrange them by liquidity level to make this section more informative. Liquid assets, such as cash and accounts receivable, are prioritised first, followed by illiquid assets, such as inventories. After identifying a current asset, you must include non-current (long-term) assets. Non-monetary assets should also be considered.
- Make an Asset Analysis
After you’ve detailed all of your asset categories, add them all up. The final count will then be recorded under the total assets category. Compare your figures against the general ledger of the organisation to ensure they are correct.
- List Liabilities
Current liabilities are those that must be paid within a year after the balance sheet date. These include accounts payable, short-term notes payable, and accumulated debts.
- Make a Liability Analysis
Make a list of the liabilities that will not be met this fiscal year. Long-term notes, payable bonds, pension plans, and mortgages are examples of these.
- Determine your Equity
Calculate your company’s retained earnings and working capital, as well as its overall shareholders’ equity. Earnings retained are profits kept by a company for reinvestment (not distributed as dividends to shareholders). The total of share capital and retained earnings is referred to as “shareholders’ equity.”
The balance is correct if obligations + equity equal assets. If it does not, you may need to go through your work again.
If you are this far on trying to learn it, it is possible.
Now you know how to create your own balance sheet. It is a great way to run your business and acknowledge your financial position.