As an owner of commercial real estate, have you ever wondered what your net worth is? The quickest way to determine your net worth is by looking at your balance sheet. You can determine the value of each property and your total portfolio this way.
In this blog, let’s find out why a balance sheet is important and what items should compulsorily form part of your balance sheet.
Why is it Important to Keep a Balance Sheet?
There are 3 important real estate company financial statements. These are as follows:
Income statement
Cash flow statement
Balance sheet
Here are some reasons why a balance sheet, in particular, is important for your business:
Risk and Return Evaluation
The most important reason for having a balance sheet is knowing the financial health of your business.
A balance sheet gives you a snapshot of your long and short-term assets and liabilities. While the assets reveal your earning capacity and liquidity status, liabilities let you prioritize your financial obligations.
When your assets are greater than your liabilities, your net worth is positive. If your liabilities are higher, you might have to pay additional debt, making the business unsustainable.
Required by Lenders
Every lender would like to know your ability to repay loans. By analyzing your balance sheet, a lender knows whether you are creditworthy or not.
Investors would look at your balance sheet to assess whether your business is viable and if they can expect a decent return on investment. A strong balance sheet with assets exceeding liabilities ensures a higher chance for loans.
Strategic Business Decision Making
A balance sheet helps you identify cash flow problems early, which could help you avoid a financial crisis. You can check your budget for any wrong assumptions and correct them. Expense control is possible only if you have a budget.
Areas of Improvement
The higher your net worth, the better your business is doing. If your net worth is not going up as expected, you need to look at the underperforming assets like slow-moving inventory and analyze the reasons for this. You either need to improve your marketing or stop making the product.
Greater Tax Efficiency
When your financial statements, including the real estate company balance sheet, are in order, your returns are filed on time, and you avoid penalties.
You benefit from the eligible deductions available. You will also get through account audits with the least amount of hassles.
Which 3 Things Must be Included on a Balance Sheet?
Your company balance sheet needs to have these three items to give you an accurate estimate of the financial health of your business:
Assets
Revenues and profits are generated from assets. It could be the equipment that manufactures your product, accounts receivables, and intellectual property.
Liabilities
What you owe to other companies or institutions, like accounts payable and long-term debt like bank loans, comprise liabilities in a balance sheet.
Equity
When you deduct liabilities from assets, you get equity. Business valuation is based on its equity.
Let’s now find out how important balance sheets are for a real estate business.
Importance of Balance Sheet in Real Estate
Like any other business, the liabilities and assets in the balance sheet of a real estate company give you a fair idea of the valuation of each property you have in your portfolio and your net worth as of date.
A rental property balance sheet comprises:
Assets
You can determine the fair market value of your investments and your bank balance.
Liabilities
Refundable security deposits and outstanding loans are included here.
Owner’s Equity
When you deduct the assets from your liabilities, you can estimate your net worth.
Conclusion
If you want to know what your net worth is, you need a balance sheet of your real estate business.
Hiring a professional accounting firm to analyze your balance sheet would be a better investment since you can focus on improving returns on your business. Know your balance sheet inside and out and take your real estate business to the next level!
About Us
OHI is a sixteen-year-old real estate services company working with 75+ commercial and residential real estate developers, funds and property management companies across USA. Our deep expertise in real estate accounting, financial analysis, lease administration and asset management has helped clients cut associated costs by 40-50%. We now provide these services to a portfolio of 100000 units across clients.
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