While sole traders and partnerships aren’t legally required to prepare a balance sheet for tax filings and don’t need to submit accounts to Companies House, it’s still highly recommended that a balance sheet be created and maintained even when you don’t need one.
Quite honestly, a balance sheet is a powerful tool for making business decisions. While they can take some time to learn to read, the way they present information is extremely useful.
Why Do You Need a Balance Sheet?
As a limited company, of course, you need a balance sheet as part of your tax records. But balance sheets are also a key part of your management accounts. Management accounts weren’t designed for tax records; over decades, the techniques for management accounts have developed to help to plan for the future.
Your balance sheet is a snapshot; it gives you a clear, detailed picture of your assets, liabilities, and your net book value at the moment the balance sheet is created.
Only the smallest sole traders can really keep all of this information in their heads, but experience has taught us that as a business grows, some owners continue to believe their mental picture is accurate enough to be useful over time. (Even then, we recommend you keep your Profit and Loss (P&L) sheet up to date.)
With these accounts, you can more easily and effectively identify where individual projects, products, or customers are becoming a problem. Starting while still a small business gives you practice reading these reports for the point where the business has grown enough that there’s no other way to track your performance.
Many lenders also require a balance sheet as part of a loan submission. Your balance sheet will show what existing obligations you have, and it also confirms the extent of your assets. This information allows lenders to feel confident when offering loans.
Using Your Balance Sheet
A balance sheet is split into two sides (the name comes from the process of balancing the two).
You record your assets on one side. This includes the value of all property and equipment owned by the business and the total liquid assets. Calculating equipment value can often be the most complicated part of the process.
On the other side, current liabilities should be added – this is anything payable within a year – wages, loans, pending supplier payments, and taxes – alongside your equity (retained earnings and common stock).
You should find that the two values are identical. If they aren’t, check all starting figures and calculations carefully to identify any error in your working. If there’s no error in your working, you have a serious problem on your hands. Most likely, the issue will be with your cash flow.
If you find you have a serious issue, we encourage you to get in touch – we may be able to help you identify the problem and start figuring out a solution.
