According to Investopedia, financial statements are written records that convey the business activities and the financial performance of a company.
The Balance Sheet is One Such Financial Statement
A Balance Sheet is like a snapshot of what a construction company owns and owes at a particular time. It also shows the amount invested by the owner or shareholders. Along with other important financial statements, it allows for a fundamental analysis of the business’s financial well-being. The three aspects of a Balance Sheet are:
Assets – what the business owns or is owed
Liabilities – what the business owes to others
Equity – the owners’ investment and the retained earnings
The formula is total assets = total liabilities + total equity.
Just as a tightrope walker must remain vigilant and move arms or a pole in reaction to imbalance, a Balance Sheet requires regular attention and an understanding of the dynamics of each of its components.
Picture of Financial Health
Developing and maintaining a Balance Sheet allows you and others to understand your construction company’s financial health better. Here are three views to consider.
What You Need to Know Now
A Balance Sheet gives you the information you need to assess your project and your construction company’s financial health. It tells you where your business currently stands financially.
Planning for the Future
Your balance sheet is an excellent source of information when determining if specific proposed projects are likely viable and profitable. For example, it allows you to assess what portion of the assets you own are liquid and whether you have enough cash on hand to meet current demands.
When lenders look at your construction company’s balance sheet, their goal is to analyze your company’s financial performance. They try to determine if the profit figures are sustainable over the coming quarters and years. And, of course, they’re trying to assess your company’s ability to repay the loan.
It’s vital that every account on the Balance Sheet is addressed regularly. For example, not only bank accounts and credit cards need to be reconciled but also accounts such as vehicle loans and other notes payable, employee advances or loans to others, and more. You’ll recognize a good accounting pro when they assess every Balance Sheet account for accuracy monthly.
To Sum Up
Your construction company’s Balance Sheet is a breakdown of what you own and what you owe. It is a tool for helping you assess where you are and where you can be. It is also a part of the picture lenders need to have when determining whether to provide funds.
Reflection: When was the last time you and your accounting pro discussed the accuracy of your Balance Sheet?
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