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Why Prepare Balance Sheet?

Why Prepare Balance Sheet?

Ever wondered why businesses bother with a balance sheet?

Let’s break it down without the complex financial terminology. Just take into consideration your business as a snapshot at a particular moment, like the end of the month.

The balance sheet shows you a clear picture of your financial health. It’s like a reality check, showing what you own and what you owe.

What’s In The Balance Sheet?

Think of it as a list that tells you what your business has and owes. It covers three main things: assets (what you own), liabilities (what you owe), and shareholder’s equity (what’s left for the owners).

Assets are like the valuable stuff your business owns, from cash and stock to buildings and equipment. It’s what you’d have if you sold everything.

Liabilities are debts your business owes to others. There are short-term ones (due in a year) and long-term ones (due later).

Shareholder’s equity is what’s left for the owners after paying off all debts. The balance sheet ensures that Assets = Liabilities + Shareholder’s Equity – it all balances out!

A Detailed Insight Into Assets And Liabilities

  • Current vs. Non-Current: Your assets and liabilities can be further classified as current (expected to be settled within one year) or non-current (long-term). This distinction helps assess your short-term liquidity and long-term financial stability.
  • Valuation: Accurately valuing your assets and liabilities is critical for a true picture of your financial position. This may involve complex accounting concepts like depreciation, amortisation, and fair market valuation. Consider seeking professional guidance for intricate assets or valuations.
  • Classification: Understanding how to classify your assets and liabilities by Australian accounting standards and industry best practices is crucial for ensuring accurate financial reporting and transparency.

Top Benefits Of Preparing A Balance Sheet? 

Beyond mere compliance, preparing your balance sheet regularly offers a range of benefits:

  • Financial Tracking And Control: The balance sheet, which functions as a financial dashboard, provides a concise and straightforward summary of your financial status. You may use this data to monitor your financial situation, look for trends, and make informed decisions by reviewing it frequently.
  • Improved Borrowing Ability: Lenders examine your balance sheet among other important documents to assess your creditworthiness and risk tolerance. It increases your chances of obtaining a decent loan when you have a solid balance sheet with high ratios, which demonstrates that you are a steady borrower.
  • Internal Decision-Making: The basis for both budgeting and strategic planning is the balance sheet. You may decide on investments, cost control, and expansion strategies with knowledge of your resource allocation and budgetary limitations.
  • Early Warning System: A potential early warning system for impending financial trouble is the balance sheet. By spotting patterns in decreasing assets, rising obligations, or negative equity, you may take proactive measures to resolve problems before they become more serious ones.

How To Put Your Balance Sheet To Work?

  • Ratio Analysis: Analysing key financial ratios derived from your balance sheet, such as the current ratio, debt-to-equity ratio, and liquidity ratio, provides valuable insights into your financial health, efficiency, and solvency.
  • Trend Analysis: Tracking changes in your balance sheet over time helps you identify patterns and trends in your financial performance, allowing you to forecast future performance and make informed adjustments.
  • Benchmarking: Comparing your balance sheet ratios with industry benchmarks can reveal areas where you excel or lag, offering valuable insights for improvement.

Conclusion 

The balance sheet isn’t just a dusty document at the back of the cabinet, it’s a powerful tool for understanding your business, making informed decisions, and securing long-term success. By regularly preparing your balance sheet, you gain valuable insights into your financial position, equip yourself to make strategic choices and handle the business issues with confidence. 

If you are facing any challenges preparing a Balance Sheet, you can consult KPG Taxation. Their expert tax agents will help you with detailed insights on it and offer you immense support so that you can concentrate on your business while they take care of your accounts! 

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