A business' balance sheet helps both investors and business owners make wise business decisions. The balance sheet shows the business' overall financial health by listing all of its assets and liabilities, as well as its cash flow and income. Investors can use this information to determine whether to invest in the business or extend credit to it, while business owners can use it to determine whether their businesses are earning money and decide what to do if they are not.
Line of Credit
Potential creditors can use your balance sheet to determine whether to extend you credit or how much credit to extend. By analyzing your profits and losses, creditors can determine whether you make wise financial decisions and whether you are likely to be able to stay in business and earn enough revenue to pay them back. Creditors can also determine whether your business already carries too much debt by examining your assets and liabilities.
If your business is not making a profit, you can determine what expenses to cut by examining your balance sheets. For example, if you have a large number of long-term liabilities, such as loans, and also have a large amount of payroll going out to employees, you may consider whether to let some employees go to save money. You may also wish to consult your balance sheets before making any large-scale purchases for your business or taking out any additional loans to ensure that your business can afford to do so.
If your business is not doing well, your balance sheets list all of your assets; thus, you can easily determine whether you can liquidate any of your assets to pay off business debts. If you have to liquidate a large number of assets to get your business to break even, you may decide to file for bankruptcy or to close your business. Consult a bankruptcy attorney before taking these steps to determine the best options for your business.
If you or your business is considering investing in someone else's business, examine the other business' balance sheets carefully. If the business has a large amount of liability relevant to its assets, a negative cash flow or little income, the business is probably not a wise investment. If the balance sheets show that the business is making a profit or that it has few liabilities, the business is likely to make you money if you invest in it.
Jack Ori has been a writer since 2009. He has worked with clients in the legal, financial and nonprofit industries, as well as contributed self-help articles to various publications.