One of the biggest mistakes budding entrepreneurs make is not taking time to understand their company’s financial statements. A balance sheet otherwise known as the statement of financial position can serve as an internal guide for decision making and it could also be used to report the financial health of your business to lenders, investors and other stakeholders.
A balance sheet is made of three important components;
Assets are the valuable things owned by your business such as cash, bank balance, inventory, vehicles, equipment, buildings, accounts receivable, which is money customers owe you for sales made but not yet paid for.
Liabilities represents the financial obligations your business has to creditors and other parties such as accounts payable, which are purchases you have made but not yet paid for; taxes you owe, loans etc.
Capital is the direct investment you make in your business or given by investors to either start or maintain your business. Retained earnings which is the portion of profit plowed back into the business also forms part of capital
The simple balance sheet definition is;
Assets = Liabilities + Owner’s Equity
Uses of Balance Sheet for Entrepreneurs
- It can be used to secure loan and other capital: It allows stakeholders to quickly access the financial condition of your business and determine your credit worthiness. It shows your investors your ability to collect payments and repay debts.
- It helps to determine risks and returns: It helps to show your business can cover short-term obligations. For instance, if your current assets such as cash and bank balance can cover your current liabilities such as short term borrowings, it means your business does not require working capital.
- It helps to Know the net worth of your business: It shows how rich or poor your business is. This is computed by the difference between total assets and total liabilities. The wealth of your business could indicate that the Company can sustain future operations.
We encourage you to understand and prepare a balance sheet for your business today! We have provided a balance sheet template to serve as a guide, please feel free to download using the link below ………………