You know your balance sheet is important; you file it away carefully after each accounting period and produce it whenever your company needs a loan or when it’s time to produce a detailed update for investors.
There are additional areas where the balance sheet is used that you may not have considered. It underscores the importance of accuracy and timeliness in producing these reports. Take a look:
Better Decision-Making
When determining future investments, whether to expand certain areas of your business or if it’s time to bring on that new operations manager role, the balance sheet provides an accurate picture of your business’s equity. You’ll get at-a-glance understanding of key areas of your business:
· Profitability
· Liquidity
· Solvency
· Productivity
These areas help you determine your long-term sustainability as a company. With a complete balance sheet, you are able to produce budgets, make adjustments to operations, set sales goals and more.
Transparency for Potential Investors
It’s not just about keeping your current investors happy and calm; it’s also about building a reputation for solid financial management that attracts more investors. It will show that you have built credit over time and that you repay debts on time with a proven track record.
Risk Management
A balance sheet helps you identify areas of risk, such as a debt that is becoming cumbersome or if you should be seeking out a way to refinance. The balance sheet helps you identify risk before you are forced to react to its impact on your company.
This aspect of your balance sheet keeps your finance department happy. They want to see that you have more assets on your balance sheet than long-term liabilities, protecting your net worth. By demonstrating that your short-term assets can cover your short-term liabilities, you prove that you can cover your short-term obligations.
Quick Question: What’s the difference between a balance sheet and an income statement?
This is a common area of confusion for business owners, but the answer simply comes down to time. An income statement is produced for a specific period, such as a month, while a balance sheet is a snapshot in time.
Whether you have additional questions about your balance sheet, or you are realizing that it’s time to invest in an accurate and reliable service for financial reporting, The Power CFO is here to help. We offer financial reporting as part of our extensive accounting services and look forward to a chance to hear about your business. Contact us today!
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