Are you one of the many business owners that struggle to keep up with your business’s bookkeeping and financials? Regular financial statement generation and bookkeeping provide your business with a strong foundation to make informed business decisions, secure funding, and grow operations.
One of the most important financial statements that business owners should regularly generate is the balance sheet, which provides insight into what you owe, own, and have made. The importance of the balance sheet extends into many different areas of your business, making it vital to implement the necessary controls to ensure that all accounts are up to date.
Understand Your Current Financial Health
The balance sheet helps you understand the current financial health of your business. How much do you owe suppliers and vendors? What amounts do customers owe you? Real-time access to account balances, such as cash, accounts receivable, inventory, accounts payable, and loans payable is vital to make the most informed decisions.
Additionally, business owners, investors, and lenders frequently calculate financial ratios to analyze the health of the business. Liquidity, solvency, and valuation metrics all include items from the balance sheet. To derive the most value from these ratios, you want to have up-to-date numbers on which to base the calculations. Understanding where your business currently stands is important to make strides toward growth.
Ensure All Deductions are Recorded
When you record a transaction in your accounting ledgers, the item will be run through both the income statement and the balance sheet. This means that by ensuring accuracy in your balance sheet, you are promoting accuracy in your income statement. Completing bank and credit card reconciliations are great ways to ensure completeness in your accounting records.
Expenses like chargeback claims, utilities, office supplies, and ACH payments can easily be forgotten. By prioritizing an up-to-date balance sheet, you are boosting your chances of catching every qualifying business deduction, reducing your taxable income.
Secure Investors and Loans
Finding additional sources of funding can be difficult if you don’t have recent financial statements. The balance sheet allows investors and lenders to easily assess the condition of your business. If you purchased more assets or paid off your loans, you want these changes to be reflected on the balance sheet these individuals are reviewing.
Furthermore, a healthy balance sheet shows lenders that you are trustworthy and can pay back your debt on time and without defaulting. The potential return on investment and uses of the funds are additional areas that the balance sheet will help uncover. The more informed your lenders and investors are, the higher the chances of you receiving funding or additional investments.
Plan for Long-Term Growth
Growth usually doesn’t happen by chance. In fact, scaling your business takes hard work, strategic goals, and transparency in operations. Growing your business can require extensive cash to purchase new equipment, hire additional employees, or enter new markets. Tracking the receivables and cash account in conjunction with upcoming obligations to suppliers allows you to make decisions on how to attain growth.
Maybe this includes setting aside a certain amount each month towards new equipment or creating a budget that you track weekly. Whatever the case, having insight into operations through balance sheet accounts is vital to effectively plan for the long-term growth of your business.
Prepare for Tax Time
Tax time approaches quickly for small business owners. Neglecting to have your balance sheet updated runs the risk of filing late returns or being unable to engage in tax planning. Regardless of your business size, tax planning provides legal strategies to reduce your tax liability; however, these methods must be implemented before year-end to be effective.
When you have an up-to-date balance sheet throughout the year, you can find ways to reduce your tax bill, such as taking advantage of bonus depreciation or contemplating switching accounting methods. Without an updated balance sheet, you won’t be able to make these decisions. Additionally, updated bookkeeping and financial statements lead to less time needed to prepare the books at year-end, giving you the ability to file tax returns with plenty of time to spare.
Manage Cash Flow
Cash flow is one of the downfalls of many small businesses. You might have an innovative product or service, but if you don’t manage your money right, you are more likely to fail. Cash flow management focuses on the cash account, which is found on the balance sheet. Since banks only issue statements once a month, that means you must regularly enter or download transactions to have clarity on what the true balance in your checking account is. This is especially important if you regularly write checks.
By consistently updating the cash ledger balance, you can understand how much you have to spend at that point in time, leading to more beneficial budget plans and the ability to leverage your balance. For example, if you realize that you have a large cash balance, maybe you decide to take advantage of early payment discounts from vendors or purchase that piece of machinery you’ve been needing. On the contrary, if your balance is running low, you might decide to hold off on putting in that supply order or call up customers to remind them of their balance due. Having the ability to make these decisions rely on updating your balance sheet regularly.
Summary
Balance sheets are one of the main financial statements that all businesses should prepare on a regular basis. From updating the checking account balance to managing your cash flow, the balance sheet is an important area when running a business.
Accurate balance sheet creation takes different procedures working in the background, like bank reconciliations and journal entries. As a busy business owner, you might not have the experience or time to properly prepare these items.
This is when working with an expert, like BUSINESS, can be useful. Our team has years of experience helping businesses of all sizes realize the benefits of an up-to-date balance sheet. For more information, reach out to a team member today.
