Balance Sheets 101: Five Key Things Every Business Owner Must Know

As a business owner, you want to make sure your company is financially healthy. One important tool to help you do that is the balance sheet. By understanding the figures on your balance sheet, you can make better decisions about your business's finances. Let's break it down into five key things to know.

What even is a Balance Sheet?

Think of a balance sheet like a snapshot of your business's financial position at a specific moment in time. It can also help you identify areas where the business needs improvement and take measures to reduce its debts.

Your Balance Sheet answers the question "Can the business pay it's bills?"

If your assets (what you own) are more than your liabilities (what you owe), your business can pay its bills on time. We call this solvency.

You can assess your business's solvency by comparing your assets to your liabilities. If your assets exceed your liabilities, you're solvent.

If you see that your liabilities are high compared to your assets, you might decide to focus on paying down debt.

Or, if you see that your total net assets are growing, you might decide to reinvest in your business to fuel further growth.

Total Net Assets = How Much is My Business Worth?

Total net assets are the difference between your total assets and total liabilities. It's the net worth of your business.

This is an important number to keep an eye on. If your total net assets are negative, it could be a sign that your business is in financial trouble.

While the balance sheet is a useful tool, it has limitations. For example, it may not show the current market value of some assets, which can lead to over or under-valuation.

It also doesn't account for future events that could impact your business's financial health.

Who else cares about your balance sheet?

Investors and lenders use the balance sheet to assess the financial health of your business.

They look at figures like total net assets and solvency to determine whether your business is a good investment or a good risk to lend money to.

It's important to remember that the balance sheet is just one financial statement and should be used in conjunction with other statements, such as the income statement and cash flow statement, to gain a comprehensive understanding of your business's financial health.

By understanding its key figures, you can make better decisions and position your business for success.