How healthy is your business? Fortunately, the answer to this question is as simple as looking at its balance sheet. According to the Small Business Administration (SBA), a company’s balance sheet includes its assets, liabilities, and each owner’s share of equity as of the date of preparation. The owner’s share of equity should be the cumulative equity after making shareholder distributions. Businesses typically prepare a balance sheet quarterly and annually.
The Importance of a Balance Sheet for Any Business
Preparing a balance sheet correctly lets you know if your business is operating at a profit or loss. However, its importance goes beyond that. Leadership at your company should refer to the balance sheet when making major financial decisions to determine the impact on company stability.
Investors and lenders care about balance sheets as well. People purchasing stock in your company want to know how it has performed over the last year or quarter. Lenders want the assurance of knowing your business has adequate assets to repay its debt obligation.
Listing Assets and Debts on a Balance Sheet
The person preparing a business balance sheet should start by listing all assets in the left column. Common business assets include cash on hand, inventory, accounts receivable, and investments. Liabilities and each owner’s share of equity should go in the right column. Typical business liabilities include payroll, rent or mortgage, utility payments, and loans.
Adding the assets column and the owner’s share of equity provides you with total company assets. Calculating liabilities only requires adding everything listed in that column. The current profit or loss of the business is the difference between the assets and liabilities column.
Determining Business Debt Ratio
Knowing your company’s debt ratio is another helpful way to understand its financial health. The way to arrive at this figure is to divide total liabilities by total assets expressed as a percentage. As an example, having $1,000,000 in assets and $500,000 in liabilities would present a debt ratio of 50 percent.
The higher your company’s debt ratio, the more control others have over it. Each industry maintains its own criteria for what constitutes an acceptable level of debt. Other important things you can learn from your business balance sheet include:
- Profitability growth rate, which you determine by comparing annual balance sheets.
- Return on investment for purchased assets is the amount spent to acquire the asset versus how much revenue it has generated for the company.
- Return on equity shows how well your company has managed capital and investments, including shareholder investments. To arrive at this figure, divide the shareholder’s equity by net business income.
Balance Sheet Preparation Just One of Palmetto Payroll’s Management Reporting Services
Preparing balance sheets on top of everything else needed to run a company can be time-consuming. Although necessary, the activity does not produce revenue. By outsourcing this and other administrative tasks to Palmetto Payroll, you have more time to focus on managing and growing your company. Please contact us to learn more about our services or to schedule a consultation.