What The Hell Is A Balance Sheet Anyway?
Most business owners feel that the only financial reports they need to is the Profit and Loss statement. While this is important, one of the common financial reports that is even more important is the balance sheet.
So, what the hell is the balance sheet and how can it help me? In short, it is the financial worth of your business at any given time. I have an accounting degree and I have struggled to understand the importance of the balance sheet myself. I mean I knew about assets, liabilities, and equity. I knew what they were and that the assets must balance with the liabilities and equity, yada yada yada. I didn’t fully grasp the importance of it until I dug more in depth about the information that could be gathered from it. So let’s go over a few things:
Assets-Assets are things that you own and if you had to you could sell them and make money off of them and keep your business running
Liabilities-Liabilities are things that your business owes. This could be the balance on a credit card, a vehicle loan, a business loan, payroll, and just plain everyday bills. These are things that you have to pay or it will cause problems with your credit and possibly your suppliers.
Equity-This is basically how much the business is worth after your liabilities have been subtracted from your assets.
One of the items that you can gather from your balance sheet is your debt to asset ratio. Basically, this means how much debt you have compared to your assets, usually shown as a percentage. If the debt to asset ratio exceeds 100% it means that a company has more liabilities than assets and may go bankrupt soon. The higher the percentage the higher your financial risk will be which will make it difficult to get financing for anything and if you do get financing it will be at a much higher interest rate.
So what does this mean to you? While the profit and loss statement is a very important financial statement the balance sheet is much better at showing you whether your business is financially stable or headed to bankruptcy at any given time.
If you are looking for somebody to help you understand your business finances, help you make better financial decisions and make sure that your business is and continues to be headed in the right direction, contact Collins Bookkeeping Services www.collinsbookkeeping.com 615-768-9321, so we can help you plan for the future and grow your business!
Tracy Collins | 03/10/2020