How balance sheets help your business
Lombard Accountants believe that understanding the story your balance sheet tells about your business is vital to your businesses success. It’s important you understand the components of your balance sheet and the key ratios that measure the health of your business.
So what does a balance sheet tell you about your business? The Lombard Accountants team have put together a guide on balance sheets to bring you up to speed on how a balance sheet benefits your business.
1. It measures the net worth of your business.
The company balance sheet is made up of all of your assets and liabilities; your net worth is your total assets less total liabilities.
Current assets are assets that are expected to be converted into cash within a year; current liabilities are expected to be paid within one year.
Non-current assets aren’t expected to be converted into cash in the short term; non-current liabilities are long-term liabilities that aren’t expected to be paid within 12 months
Your net worth is the owners’ interest in the business. In other words, if your business was to be wound up this is how much you’d be left with as the owner of the business.
2. It tells you if your business is solvent.
Solvency is the acid test for the survival of your company. It is vital. If your business is insolvent, without immediate action to remedy this, it’s unlikely to survive for long. There are two components to solvency:
Current ratio greater than 1 (current assets / current liabilities)
Positive net assets (total assets – total liabilities)
If your business is insolvent, you’ll struggle to pay bills on time and you may be personally at risk. It’s imperative you seek help immediately if your business is insolvent.
3. It allows you to track the strength of your business.
By comparing your balance sheet to previous periods in your companies lifeline, you can track whether your net worth is increasing or decreasing and thus gauge where your finances and indeed your business is at. The stronger your balance sheet, the easier it will be for your business to survive a downturn. For example, if your retained earnings are diminishing over time, it’s clear that you need to take action to strengthen your Balance Sheet to ensure you’ll receive value upon the wind-up or sale of your business.
4. You can calculate key ratios.
Key ratios not only allow you to compare your results year on year or to industry benchmarks, but they also highlight areas for you can improve on.
For example, calculating your debtor days may show that it takes on average 35 days for customers to pay you. If your payment terms are within 7 days of the invoice, it’s clear that your debtor processes need to be strengthened.
For the latest business/practice news, taxation/financial resources and our Newsletter, visit https://la.ie/