Balance Sheets 101: 5 Key Things to Know

As a business owner, you want to make sure your company is financially healthy. One important tool to help you do that is the balance sheet.

It gives you a snapshot of your company's assets, liabilities, and equity at a specific moment in time. But what does that actually mean for your business?

Let's break it down into five key things to know.

What's a Balance Sheet?

Think of a balance sheet like a snapshot of your business's financial position at a specific moment in time. This can help you make important decisions about your business's financial health.

Can your business pay its bills? Your Balance Sheet Can Answer This

If your assets (what you own) are more than your liabilities (what you owe), your business can pay its bills on time. We call this solvency.

You can assess your business's solvency by comparing your assets to your liabilities. If your assets exceed your liabilities, you're solvent.

Total Net Assets = How Much is My Business Worth?

Total net assets are the difference between your total assets and total liabilities. It's the net worth of your business.

This is an important number to keep an eye on. If your total net assets are negative, it could be a sign that your business is in financial trouble.

Who else cares about your balance sheet?

Investors and lenders use the balance sheet to assess the financial health of your business.

They look at figures like total net assets and solvency to determine whether your business is a good investment or a good risk to lend money to.

Why does this even matter? The balance sheet can help you make better business decisions

By understanding the figures on your balance sheet, you can make better decisions about your business's finances. If you see that your liabilities are high compared to your assets, you might decide to focus on paying down debt.

Or, if you see that your total net assets are growing, you might decide to reinvest in your business to fuel further growth. Plus, it can help you identify areas where the business needs improvement and take measures to reduce its debts.

It's important to remember that the balance sheet is just one financial statement and should be used in conjunction with other statements, such as the income statement and cash flow statement, to gain a comprehensive understanding of your business's financial health.

While the balance sheet is a useful tool, it has limitations. For example, it may not show the current market value of some assets, which can lead to over or under-valuation. It also doesn't account for future events that could impact your business's financial health.

In short, the balance sheet is a valuable tool for assessing your business's financial health, but it's not the whole picture.

By understanding its key figures, you can make better decisions and position your business for success.