Keeping in control of your business finances is a fundamental part of good management. And regularly checking the company’s balance sheet is central to your financial oversight.
But, for the uninitiated, what exactly is a balance sheet? How do you go about setting up this balance sheet in your accounting software? And what do the numbers in this financial report actually tell you about the current health of your company?
To get you up to speed, here’s our guide to the balance sheet.
The advantages of a balance sheet
Knowing how your business is performing is a crucial part of keeping a company on the road to success – and having a good grasp of your key financial reports is an essential part of this.
What your balance sheet does is show you three core elements of your finances – the assets, liabilities and equity in the company – at a certain point in time.
So your balance sheet will be made up of:
Assets – the things you own in the business, including cash and accounts receivables
Liabilities – the things you owe other people, including unpaid bills and loans
Equity – the cash you initially invested in the company, plus any additional income you’ve made (or losses incurred) over time.
These three elements come together in the balance sheet to show the current worth of the business, paused in time on the date your run the report.
As the business owner, or the management team, having a clear breakdown of the worth of the business helps enormously when looking at whether you’re meeting your goals, have created a return on your investment, or have the finances and assets for the next stage in your growth.
Setting up a balance sheet
If you’re using any kind of professional accounting software to manage your business finances, running a balance sheet couldn’t be easier.
Click through to the reports section, choose ‘Balance sheet’ and your accounting application will pull together all the relevant data re your assets, liabilities and equity from your current ledgers.
Reports in Xero online accounting
You’ll then have your overview of the company’s financial position, correct up to the date that you’ve run the report – this is a snapshot of your finances on one particular date, remember.
The difference between your balance sheet and P&L
The profit and loss (P&L) statement is another key financial report and one that’s commonly associated with the company’s balance sheet – but what are the differences between the two?
The balance sheet – as we’ve explained, the balance sheet is a snapshot of the company’s financial position, shown at a specific point in time.
The P&L statement – your P&L, however, shows you a broader financial picture, by showing you the company’s revenues, expenses, and most of the gains and losses from a specified period of time – whether that’s a month, a quarter or the whole financial year.
So, the balance sheet shows you the worth of the company, and the P&L shows you profit and loss in the business over a set period of time.
Balance sheet forecasting
The balance sheet is an extremely useful tool for showing you the financial position of the business as it stands right now – but what if you want to know the likely financial position at a point in the future? To achieve this, you’ll need to look at balance sheet forecasting.
Every financial transaction that takes place within the business has an impact on your balance sheet – whether it’s adding to your assets, increasing our liabilities or reducing the overall equity you hold in the company.
What forecasting and projections do is allow you to factor in key transactions within the business and then predict the potential impact on the position of your finances.
Income from sales – if you have a good estimate of your sales for the next month, you can sum up the invoice totals and add this into your balance sheet numbers. Any income from these sales will be added to your ‘Accounts Receivable’ total, and will therefore increase your total assets.
Taking out a loan – if you’re planning on taking out a bank loan for a new project, you can add this amount into your balance sheet forecast. This loan amount will be added to the Liabilities column.
Purchases made with cash – if a big cash purchase is on the cards, this will impact on the Cash line of your overall company assets. It will also be reflected in your cashflow statement, another key report within the financial reporting suite.
The cashflow statement reflects the cash inflows and outflows within the business over a given period – in the same way that your P&L statement reflects changes in income and costs. And by considering your cashflow, P&L and balance sheet together, you can increase the breadth and clarity of your financial forecasting.
Using cashflow forecasting to manage your financial future
Cashflow forecasting gives a future view of your cash position, allowing you to answer questions such as ‘can I make payroll?’ or ‘what will happen if I employ someone new?’
To work out a forecast manually can be a complex task, and something best left to your accountant. But with a smart cashflow app, like Fluidly, the process is far easier to set up.
By integrating directly with your accounting system, your cashflow forecasting tool has access to all the data in your business, and can do the heavy lifting for you to produce a clear forecast of your main financial areas.
With this future view of your finances, you can feel far more informed about what lies ahead for the business, and this has a number of benefits.
Having clear financial forecasting:
- Gives you and your management more confidence about your future financial position
- Provides potential investors and lenders with a clear view of the value of your company
- Helps you ensure financial stability for the company, both now and in the future.
The best possible view of your financial position
By getting to grips with your balance sheet, P&L and cashflow forecasting, you can give yourself real comfort about what lies ahead in the coming months of trading – and that’s invaluable when you’re aiming to drive your business to the next stage in the business journey.
Find out more about the basics of financial management in our Fluidly blog.