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The Balance Sheet: A Critical Document to Understand Your Business Finances

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The Balance Sheet: A Critical Document to Understand Your Business Finances

Here’s the tough news. Among the top reasons for today’s business failures are misunderstanding and mismanaging resources, and having insufficient cash. Enter the balance sheet.

 

What’s a Balance Sheet?

A Balance Sheet is one of three critical financial documents for your business: Balance Sheet, Income Statement and Cash Flow Statement.

The Balance Sheet summarizes the financial position of an organization at a point in time, and it illustrates the enterprise’s net worth. It is typically thought of as having two ‘sides’ that have to balance in total. On the left are found assets—what you own, and on the right liabilities—what you owe, plus the owner’s or shareholders’ value of ownership (equity.)

 

Why Do I Need a Balance Sheet?

A Balance Sheet provides a way for an owner to measure and understand the financial ‘health’ of the business. This includes insight to pay bills, plan for the future and keep the enterprise in operation. The principal features of the balance sheet focus on what is owned: cash, inventory and property, and what is owed: rent, wages, utilities, other operating costs, purchases being made, loans and taxes. Without a clear financial ‘picture’ of the business, an owner can make fatal spending or investment decisions.

The Balance Sheet is used to compare today’s business health with Balance Sheets from prior periods, so that financial trends are clearly obvious and corrective action, if needed, can be taken.

 

How Do I Understand My Business?

The management concept is fairly simple. A business has to pay for all the things that it owns (the left, or assets side) by borrowing money, spending money or getting money from investors. Looking at each aspect of the Balance Sheet shows where you stand, so that you are not guessing or gambling on some positive outcome. Rigorous use of and review of a Balance Sheet will help prevent possible crippling errors in business management.

 

A Balance Sheet includes such items as:

 

Assets
  • Cash, and cash equivalents like certificates of deposit.
  • Accounts receivable—funds that are owed to the business by customers.
  • Inventory—goods that have been purchased and are ready for sale.
  • Fixed assets including land, buildings, machinery and other durable items that you own.
Liabilities
  • Bank indebtedness.
  • Rent, taxes, utilities.
  • Wages payable.
  • Customer deposits or pre-payments for goods or services yet to be delivered.

Owner’s or Shareholders’ Equity

This is the difference between Assets and Liabilities and represents the available earnings that could be invested to fund expansion or continue operations.

 

Professional Help is Advised and Available

It is wise to get professional assistance, rather than muddling thru financial reporting alone. A qualified CPA firm will provide proper structure, itemization and reporting of your key financial tools.

Estess CPAs, a leading CPA firm based out of New Orleans, LA, specializes in serving the needs of small businesses and provides experienced professional accounting, bookkeeping, tax planning and payroll services.

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