Many small businesses reliably produce a set of financial statements each year, listing assets and liabilities, revenue and expenses, cash flow and shareholder equity. Often, outsourced bookkeeping services prepare these reports, but the documents are quickly forgotten by business leaders as they focus on the day-to-day challenges of running the company — particularly since these documents are rarely required for tax preparation and other small-business reporting.
However, the balance sheet can be extremely beneficial to small business owners. It may help to think of your business’s balance sheet as a scorecard or report card that shows the status of your business’s finances at a given moment in time.
The balance sheet can do several valuable things for your business:
1. A balance sheet shows you the big picture.
When you’re running a business day today, it’s easy to get focused on whether cash is coming in or not, whether you can pay your bills, and if you’re making payroll. Balance sheets go beyond this short-term view to show your business’s progress over time. Owning plenty of property but having no cash on hand may be a symptom of profitability in the past without adequate planning for the future. Having plenty of cash but no tangible assets may reflect a short-term investment strategy. A balance sheet tells a story, and an attractive balance sheet reflects shrewd long-term decision-making.
2. A balance sheet helps you measure the value of your business.
You may not be planning to sell your business anytime soon but having an idea of its value (that is, the owners’ equity) can give you insight into your options for its future.
The balance sheet summarizes your company’s assets (what you own), your liabilities (what you owe), and equity (money invested into the business, plus profits). The balance sheet doesn’t show trends but instead shows the financial state of a company at a specific point in time
3. A balance sheet can serve as an early warning system.
Between the beginning and the end of the year, is your owners’ equity growing or shrinking? A well-run business should produce growing equity. If your business isn’t doing this, looking at the specific assets and liabilities on your balance sheet can help you find out why. For example, if most of your assets are inventory, that’s risky. Inventory that doesn’t sell quickly becomes a liability. Has your business calculated its gross profit margin? Do your current liabilities exceed your current assets? An outsourced accounting professional can help determine if your balance sheet displays red flags.
4. Help Investors Understand Your Business
The Balance sheet is also important because it lets banks know if your business qualifies for additional loans or credit. Balance sheets help current and potential investors better understand where their funding will go and what they can expect to receive in the future. Investors appreciate businesses with high cash assets, as this insinuates a company will grow and prosper. Without an up-to-date and accurate balance sheet, it is unlikely your company will be able to secure the proper funding.
5. You May Need it During Tax Preparation & Filing
For federal income tax purposes, only C corporations are required to complete a balance sheet as part of their annual return. This balance sheet compares items at the beginning of the year with items at the end of the year. The IRS wants to see that the balance sheet included with Form 1120 agrees with the corporation’s books and records. Small corporations—those with total receipts and total assets less than $250,000 at the end of the year—are not required to complete the balance sheet in the tax return.
Hire an Accountant to Prepare Your Financial Statements
Over time, a comparison of balance sheets can give a good picture of the financial health of a business. In conjunction with other financial statements, it forms the basis for a more sophisticated analysis of the business. An outsourced accounting professional can prepare all financial documents for your business and properly analyze them to provide useful business information to aid in decision making. Finding a proactive accountant could be the difference between profitability and just scraping by.
The Bottom Line:
It is important as a small business owner you know how important it is to make the most of every tool that’s available to run a better business. The balance sheet is actually a valuable tool for businesses of all sizes to monitor their progress and see how they’re doing. If you are unsure how to construct a balance sheet or interpret the numbers, it is best to hire an outsourced accounting professional to help your business use the numbers to your advantage.
Limitless Investment & Capital Outsourced Accounting Services
When it comes to running a business, information is power. Limitless Investment and Capital’s CPAs see the balance sheet as an important decision-making tool. Understanding the financial health of your business is critical to ensuring long-term success and driving profitability. Call us today to schedule a call regarding financial statement preparation for your business.