When running a business, it’s easy to focus only on sales and profits – but your balance sheet gives a much deeper picture of your company’s financial health. Many owners don't look at it regularly, if at all, and most think it's a mystery!
What is a balance sheet?
A balance sheet is a snapshot of your business finances at a given point in time. It shows:
Assets - what your company owns e.g. cash, stock, property, equipment
Liabilities - what your company owes e.g. loans, suppliers, tax bills
Equity - the difference between assets and liabilities, which is sometimes called Shareholders funds
Why does understanding the balance sheet matter?
When running a business most small companies only file the balance sheet at Companies House, so it is commonly looked at by potential buyers, people wanting to offer the business credit, and competitors.
Reviewing the balance sheet regularly means you understand how financially stable the business is.
If creditors are growing faster than the debtors then this indicates there might be a working capital problem and suppliers might view the company as being more risky to trade with.
A healthy balance sheet needs more assets than liabilities, and growing shareholder funds can indicate whether the business is growing year on year.
Finally, if you are making decisions as to what dividends to declare you need to review how much equity is available. It isn't possible to declare dividends where there are no retained profits to do so.
Retained profits (i.e. profits after corporation tax and dividends paid) make up the equity figure at the bottom of the balance sheet, hence needing to keep an eye on the equity figure and ensure it's growing.
The balance sheet is often seen as a mystery but in reality it's a useful tool to keep on top of the health of your business and make smarter decisions. If you have any questions on the balance sheet please do get in touch with one of the team here.
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