What is a balance sheet?

If you are just starting your business, you must formulate a balance sheet for your business. 

This article has been designed to help first-timers in all things balance sheets.

What does a balance sheet mean in business terms?

The balance sheet of a business or company shows its capital and financial assets, liabilities, loans, and grants, as well as shareholders’ equity. When you have a good balance sheet, anybody should be able to see at a glance, the financial strength of your company.

A balance sheet contains three columns that hold your assets, liabilities, and equities respectively. The assets of the company include cash in hand and in the bank, monies owed by clients and customers, marketable securities, accounts receivables and payables, fixed assets, long-term assets, and intangible expenses such as intellectual properties, patents, etc.

The liabilities, as the name implies, include monies owed to vendors, salaries, rent, utilities, tax, etc.

Equity that is placed in the last column is simply the amount remaining after you have subtracted your liabilities from assets. This is one angle of looking at it. If you are looking at it from another angle, equity is the amount the business was started with including those from shareholders and investors. From this angle, the assets of a company will be the sum of liabilities and equities.

With the explanation above, it is obvious where the balance sheet got its name from – the financial statement on the sheet must always balance out!

Uses of a balance sheet

• As said earlier, you can use the balance sheet to know the financial health of a company.
• It is also a good way to attract investors especially if the business is doing well and worth investing in.
• It helps to determine quickly if the company is at risk.
• Employees can know if their jobs are secure or not when the balance sheet of the company is declared.

Shortfalls of a balance sheet

• Since the balance sheet provides only the summary of the financial transactions of the company, the daily activities and shortcomings of the company are obscured.
   
• Also, the accounts receivables are usually based on estimates and this could be used by the company managers to influence the final figures you see on a balance sheet. In other words, the figures may give an inaccurate representation of the financial health of a company unless due diligence is done.

How balance sheets differ from cash flow statements?

There is not much difference between the two, safe for probably these two.

1. The cash flow statements show how cash flows for a specific time period while a balance sheet simply gives a summary of profit and loss of the company for a time.
    
2. The balance sheet(s) can be used to prepare a cash flow statement whereas a cash flow statement may not be used to prepare a balance sheet.
    
3. The information contained in the cash flow statement is historic in nature while the balance sheet showcases current financial events of the company.

Conclusion

The usefulness of a balance sheet is in that it gives the company managers an idea of whether the company can keep going or has to liquidate its assets. A good balance sheet will also give your business enough credibility in case you may be needing a loan from financial institutions.