The purpose of a balance sheet is to show a snapshot of the financials of a business on a particular date. The balance sheet provides information of what is owed to the business as well as what it owes to creditors allowing the user to assess financial health.
Purpose of a Balance Sheet
The purpose of a balance sheet will vary from user to user and the reason that they are trying to assess the financial health of a business, but it summarises the businesses assets, liabilities and shareholders funds.
Example of a Balance Sheet
Purpose of a Balance Sheet for an Investor
Although investors are more drawn to the profit and loss account as an indicator of performance and returns on their investment, they will also review the balance sheet for the purpose of understanding the financial health of a business. The balance sheet will tell the investors how the business is being run – does it have debt, how much cash is in the bank and what assets does it own.
Purpose of a Balance Sheet for a Lender
When a lender is reviewing the books of a business to assess its status for a loan they will take particular interest in the Business Balance Sheet. The purpose of looking at the balance sheet is to assess:
- Whether the business has sufficient cash available, or convertible assets such as trade debtors, to meet the monthly repayment plan of the suggested loan;
- If the business has other loans and facilities in place that may jeopardise its ability to repay the new loan or suggests that there are fundamental problems with the business itself that a loan won’t resolve.
Purpose of a Balance Sheet for a Trader Creditor
A new trade creditor may look at the balance of a business when deciding how much credit to offer. The purpose of looking at the balance sheet is to check whether the business owes a large amount to its trade creditors, suggesting that the business may not be payment terms or it may have serious cash flow issues indicating that they pay be problem payers.
The purpose of a balance sheet differs according to the person looking at it but it gives all users a picture of financial health and stability.