Small business owners tend to view their balance sheet as something that belongs in the final accounts, and that their accountant deals with.
Knowing your balance sheet as a small business owner is important for a few reasons, but the main and traditional reason is that it is a financial snapshot of your business’ health. It answers the basic question: Do you have enough assets (what you own) to cover your liabilities (what you owe)? – often on one page.
Asset are more than just the physical bits of computer kit and furniture that you own, trade debtors or cash in the bank.
If you have deposits, prepayments or simple bonds – you need to keep a track of these. The balance sheet does this for you.
Similarly, liabilities are more than just trade creditors. Creditors only tracked and recorded on the balance sheet include PAYE & NI Contributions, Corporation Tax, loans and finance leases.
Asking questions about balances held in the balance sheet also provides understanding and clarity about underlying issues within a business that may need corrective action. For example: Assets that are no longer held may need to be written off, but the real issue uncovered is the failure of the current process within the company to relay that information to the finance function for appropriate action within the accounts.
Finally, whatever your planned exit strategy, from a finance perspective, your balance sheet, as well as profits and turnover, will have an effect on the attractiveness of your business to a potential buyer. Questions will be asked about all these areas, but “how clean is your balance sheet?” is a fairly common one. Simply put – this question is asking is whether your balance sheet is correct, and whether it has anything in it that doesn’t warrant being there e.g. debtors who have turned bad and will never pay, physical assets that have long been scrapped.
Even as a small business, the practice of reviewing and understanding your balance sheet is a good habit to acquire. Large and global companies always review their balance sheets, and with just cause, it gives them some important financial information about the health of their business.
