A quick guide to the balance sheet
By Julian Harlow
If you have started your own business, you know that the term multiskilling gives only a hint of the variety of demands placed on an owner as you work to establish a business.
Being closely involved in every aspect of your business may be necessary for an emerging enterprise, but it can risk leaving you unaware of the broader picture. One way to stay in touch with the health of your business is to take the time to understand your balance sheet and what it can tell you about your financial position.
Balance sheet basics
A balance sheet is simple in concept, showing the assets and liabilities of your business at a certain point in time.
Assets are split into current assets such as cash, accounts receivable and inventory, while non-current assets include property, equipment and vehicles owned by the business.
Liabilities are similarly divided into current liabilities such as short-term credit, accounts payable and taxes to be paid, while non-current liabilities include long-term debts such as mortgages.
Along with equity, which includes any funds put into the business by its owners, this is essentially all a balance sheet requires.
Learn how your business ticks
The effectiveness of a balance sheet comes not from its elements, but from the effort you make as a business owner to understand what those figures represent. Comparing the ratios of different classes of assets and liabilities can provide you with an understanding of the liquidity and solvency of your business and allow you to measure your finances against comparable enterprises in your sector.
A more fundamental benefit to maintaining a balance sheet is that you will be forcing yourself to keep track of changes to your financial data. Even positive changes within your business such as growth can create strains within your business that must be managed, and a regularly updated balance sheet will help deepen your understanding of your business.
This is the greatest benefit an entrepreneur can gain from a balance sheet - a better understanding of the financial needs of your business - giving a stronger basis for making decisions as your business grows.