It matters: Why the Balance Sheet is important for SMEs

A balance sheet is a statement of financial condition of a business. It reports an enterprise’s assets and liabilities at a given point in time. It is like a blueprint of what a business looks like on any particular day.

For small and medium businesses, funding is the biggest issue for growth and to get
funding, there are two ways. First is to get a loan from bankers and the other is to get
investments from investors. The balance sheet is the first document which is demanded by banks and investors because it helps them to determine how their funding will be utilised and what returns they can expect in the future. It also helps bankers to determine whether your business qualifies for additional loans or credit.

Even the government requires the balance sheet of an organization to know the correct
picture of the business before providing any financial or non financial assistance under any scheme. Now, it is clear that the balance sheet is a critical document for small businesses because it informs about the company’s financial standing to the owners, bankers and other investors. “Continuously updating your balance sheet is like growing your business,”

Most small business entrepreneurs do not have the expertise, resources or professionalism to read, understand and analyse their balance sheet. To improve their balance sheet on a regular basis, entrepreneurs need to know, “What a balance sheet is and what it says?”

A balance sheet is a financial document of a business that is prepared on a day, usually the year end, quarter end or month end. It has two sides, assets and liabilities and the total of both sides must be equal, because a balance sheet can only be prepared by using double entry system of accounting and this system serves as a kind of errordetection system: if, at any point, the sum of liabilities does not equal the corresponding sum of assets, then an error has occurred. It is an extended form of the accounting equation, which is: Assets = Liabilities +Capital & Reserves.

Assets: The assets of a company can be categorized into two parts: non current
assets and current Assets. Non current assets are longterm assets which will not be realized / settled / consumed within 12 months of the balance sheet date. For example, tangible fixed assets which have physical substance like land, buildings, machinery, furniture etc and intangible assets which do not have any physical substance like goodwill, brands, trademarks, copyrights, and patents etc. These noncurrent assets provide information about the ability of the entrepreneur to generate cash flows for the organization.
Current assets are likely to be used up or converted into cash within one operating business cycleusually 12 months. In the balance sheet receivables, inventories and cash are important current assets that give attention to an investor. Receivables are outstanding (uncollected amount). The speed at which an enterprise collects its outstanding amount can tell you a lot about its financial efficiency. If a company’s  collection period is getting stretched, it could mean problems ahead. The quicker a company gets its customers to make payments, the sooner it has cash to pay for salaries, dividend and other expenses.

Inventories are stock of products that have not yet been sold. To generate cash, you must sell the goods that you have purchased from suppliers. If the inventory grows faster than sales, it is a sign of deteriorating fundamentals. Enough cash balance is the most important part of balance sheet that attracts investors. After all, it provides more options for future growth and protection in tough times. Cash reserves also provide signals that the company has performed well.

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