Knowing what resources you have at any point of time will help you allocate them better and use them more efficiently to enhance your business. Financial planning is crucial to any start-up; time and effort needs to be invested in drafting clear financial statements to keep track of a company’s finances. In the previous article, we looked at the income or profit and loss statement. The next step will be to understand the importance of the balance sheet.
The balance sheet consists of 3 key components – the assets, the liabilities and the equity position of the company. Simply put, in the balance sheet is a statement that shows how the assets, liabilities and equity of the companies are balanced. The total amount of assets must balance the total liabilities and equity put in by the owners.
Assets = Liabilities + Owner’s Equity
The balance sheet provides a quick snapshot of the company’s resources and obligations for the time period measured. The balance sheet is therefore significant as it reflects the status of the company’s assets, which include its cash position and liquidity. It allows entrepreneurs to determine the amount of capital utilized and the way in which the business is being financed. Certain businesses may require equipment to be bought while others may involve equipment being rented or leases. The balance sheet will allow entrepreneurs to monitor the allocation of capital and resources and ensure that the allocation is done efficiently so as to maximize profit. It also keeps track of the company’s loans and equity.
It is important to have a clear idea of a company’s equity during the course of the business. The balance sheet provides entrepreneurs with a summary of how a company’s equity fluctuates in accordance to business performance. By highlighting the liabilities incurred by the company and whether the liabilities outweigh the assets of the company, the balance sheet allows an entrepreneur to determine if his company is able to perform and deliver on its promises.
Keeping track of the company’s finances closely help entrepreneurs make better informed decisions. These decisions allow for better use of resources that in turn help in making the company more profitable.