A balance sheet is a document that outlines the business’s value. It does this by listing three main things: the assets that a business owns, the liabilities that a business owes, and the equity, which is the assets less liabilities.
The balance sheet forms part of the management report pack that Creative CFO produces. Often, the balance sheet can be quite challenging to understand, so we have made it our mission to make it visually understandable.
The purpose of a balance sheet is to give interested parties an idea of the company's financial position, in addition to displaying what the company owns and owes. It is important that all investors know how to use, analyze and read a balance sheet. A balance sheet may give insight or reason to invest in the business.
The balance sheet consists of three main components:
Every business owner wants to know that their balance sheet is looking good. But what exactly does this mean? We have recorded a short video to explain.
When a business’s balance sheet is not looking too healthy, the business owners might consider taking some steps. The balance sheet can be improved in a couple of ways. Some steps can be taken immediately, but mostly the business owners have to put longer-term strategies in place to ensure positive change in the business’s financial position.
If the strategy of the business is to improve equity and make the business more attractive for potential investors, the following steps can be taken:
One important use for a balance sheet is to show whether or not a business is insolvent.
A business is insolvent when its total liabilities exceed its total assets. In other words, the business owes more than it owns. This shows that a company is in financial distress.
The Companies Act 71 of 2008 defines “financially in distress” in section 128 (f) as:
There are two types of insolvency:
It is the directors’ responsibility to assess insolvency and to ensure that the business will be able to continue as a going concern in the foreseeable future. Should there be warning signs of the business not being able to continue as a going concern directors need to take immediate action by seeking legal and financial advice. Should a director not take the necessary steps, they may be held responsible for losses incurred.
Now is the best time to get a balance sheet, but more importantly any business should monitor their balance sheet on a regular basis and the goal should be to improve the balance sheet. Creative CFO is well equipped to prepare a balance sheet for your business.
Speak to our helpful consultants, they are available for your reporting and business processing needs.
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