A survey on small businesses and their accounting habits showed that 60 percent of entrepreneurs felt that they did not have the required skills to manage their financial flow. Unfortunately, a proximately 82 percent of startups will fail because their cash flow is negative. The negative flow is attributed to failure to monitor daily financial activities because it is expensive to Hire an Accountant. It eventually leads to the collapse of most businesses by the 5th to the 10th year.
Financial experts insist on keeping a balance sheet to monitor your assets, liabilities, and equity position. The information generated by the balance sheet will help an entrepreneur to make prudent financial decisions for the business.
What Is Accounting Balance Sheet?
A balance sheet is a record of the financial position of a business at a particular time. It captures details about your liabilities, assets, and equity position. Simply put, the balance sheet will give the actual net worth of any business.
A balance sheet is prepared for a particular period like a day, week, month, and year, among other preferred durations. A progressive look at the intervals will give you an idea of how your business is performing. You can determine whether it is making any profit or you are headed to closure due to losses. You can also determine whether you will get to the desired financial goals based on the prevailing performance. It will give you a clear idea of areas that need improvement if certain financial goals are to be achieved.
A balance sheet forms a trilogy of documents that are crucial in determining the health of your business. The other two documents that will indicate your performance are
- Income statement- it indicates the net income for your business. The income is calculated as the difference between your revenue and expenditure.
- Cash flow statement- it shows how cash is moving or cash equivalent flows in and out of your business. If you trace a trend of chronic negative flows, you should be alarmed at the direction that your business is taking.
Shareholders and tax authorities require you to prepare these three documents every accounting year. The details captured in these documents are also crucial when selling it or opening up to shareholders because they can see the liquidity position and net worth.