Is your business’s balance sheet showing a negative cash balance? Of all the different accounting documents, balance sheets are among the most important. While some businesses show a positive cash balance on their balance sheet, though, others show a negative cash balance. What does a negative cash balance mean exactly?
The Basics of a Balance Sheet
To better understand what a negative cash balance means, you must familiarize yourself with the basics of a balance sheet. A balance sheet is a financial document that summarizes the financial balances of a business (or a person). It features three primary components: assets, liabilities and shareholders’ equity.
You can refer to a balance sheet to gain a better understanding of your business’s financial health during a particular period. Maybe you want to measure your business’s financial health for the previous quarter, or perhaps you want to measure your business’s financial health for last year or even five years ago. Regardless, you can generate a balance sheet for that period. The balance sheet will summarize your business’s assets, liabilities and shareholders’ equity for the specified period.
One of the most common causes of a negative cash balance on balance sheets involves writing checks. If you write a check and your business doesn’t have sufficient funds in its checking account to cover it, you may end up with a negative balance.
Millions of businesses still write checks to pay for the goods and services needed to carry out their operations. When writing checks, though, you should check to ensure that you have the appropriate funds to cover them. If there are insufficient funds in your business’s checking account, you may end up with a negative balance on your business’s balance sheet.
Another instance in which writing checks may lead to a negative cash balance is if you rewrite a check but fail to void the original check. A supplier, for instance, may not receive the original check that you send them, in which case the supplier may request a new check. You’ll need to void the original check so that it doesn’t throw off your business’s balance sheet. If you forget to void the original check, you may end up with a negative cash balance on your business’s balance sheet.
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