What's In A Balance Sheet?

Starting you own company may be confusing, especially if you have to take sole charge of all operations, which makes getting your accounts in order very important.

Businesses are required to submit details of their finances to government groups on a regular basis and if this does not occur then you'll be fined. Balance sheets show the solvency of your organisation at a fixed point in time and when they are compared to profit and loss accounts they help to give a greater picture of your businesses' financial health. As well as helping you to meet these regulations, balance sheets provide a great insight into the workings of your company.

Although they may appear to just show collections of data, the figures can be interpreted in many ways to highlight potential problems, in addition to financial successes.

What's the point of balance sheets?

As mentioned previously, you have a duty to make sure balance sheets and accounting information is generated in regard to your firm. But there are several other reasons why this data is likely to prove useful to you. For example, you might want to attract new customers and shareholders, showing them information taken from balance sheets helps to reveal the profitability of your firm and may lead to an increase in client numbers.

Likewise, bank managers will be interested to see this data if you are requesting extra investment and loans. This is because the figures making up the documents reveal the solvency of your company thanks to information they hold on your assets and liabilities.

Detailed information

There are several different kinds of assets and liabilities, and once these are recorded you will get to know your business inside and out. Fixed assets are referred to as long-term possessions and may be tangible or intangible. As their name suggests, buildings, machinery and land are tangible, while intangible are trademarks, patents and intellectual property rights.

You business will also feature current assets, which may change from one day to the other and include stock, cash, and money owed by your customers, among others. Your liabilities may also fluctuate, especially those falling into the current liabilities category, like money you owe and taxes due. Long-term liabilities include those where you have a little more time to settle balances, such as loans and creditors who require paying after one year and profits remaining after dividends have been paid out.

Putting figures into context

All this information could prove overwhelming, which is why lots of business owners prefer accountants to step in and gather it, or they embark on training courses to learn more about the subject. Where things could get a little more complicated is when this data from the assets and liabilities are compared and contrasted to show how solvent and profitable your organisation is. This is a great way to discover hidden problems, while also providing a good basis for expansion should your balance sheet show significant growth within your firm.

Accountants you hire may be keen to add and subtract your assets and liabilities to establish ratios. Ratio analysis is an important part of evaluating your company's financial health. There are several types, with some concentrating on liquidity ratios, which show your cash generating ability in the short-term.

Others are more concerned with revealing how likely you are to meet long-term financial obligations. When all this information is gathered and interpreted, you'll get a clear picture of your accounts and how your firm will progress in the current climate and beyond.