What is a Balance Sheet?
Eytan Bensoussan
4 min read
We know running a business can feel like you’re juggling a thousand responsibilities. While we know all business owners are heroes, you’re still human at the end of the day. Putting some of your energy into managing your business finances will help you understand how to better manage your business. Prioritize creating your three financial statements — a profit and loss statement (or income statement), a cash flow statement, and a balance sheet — to keep a grasp on your small business’s money management. We’ll be focusing on the balance sheet in this post, which will give you the big picture of your company’s worth.
What is a Balance Sheet?
A balance sheet summarizes your small business’s net worth at the end of a specific time. It will tell you how much you own and how much money you owe to your creditors.
A balance sheet will help other parties, like lenders and investors, decide if they should loan your business money.
Most importantly, a balance sheet gives you the most current representation of your business’s financial position, which can help you make smarter decisions to make your business run better and make more money.
What Does a Balance Sheet Tell You About Your Business?
The main purpose of the balance sheet is to give you a clear understanding of your business’s financial health. While it doesn’t give you specific breakdowns of how money is being spent, like you would find in a cash flow calculation, you will be able to reference it to know general figures. Including:
- How much money you’ve put into your small business
- How much debt you have
- Current assets (what your business owns)
- Current liabilities (what your business owes)
This information is especially important because it can help you keep a pulse on your current assets to liabilities ratio. This ratio shows whether your business is financially healthy enough to pay off its debts.
What is on a Balance Sheet?
Balance sheets are organized into three primary categories: assets, liabilities, and owner’s equity.
Assets
Assets refer to the things your business owns. These assets have a dollar value, and should be listed on your balance sheet according to liquidity, which refers to how easily this item can be turned into cash (think, selling something off). You’ll want to organize this section according to the type of asset as well.
Current assets, or short-term assets, are assets that you expect will be converted into cash within the current year. These include:
- Money in your small business’s checking account
- Money that is being transferred between accounts
- Accounts receivable (money your customers owe you)
- Inventory
- Prepaid expenses
- Currency, stocks, or bonds
Long-term assets are the second category you’ll want to add to your balance sheet. Long-term assets refer to things you don’t plan to convert to cash within the current year. These include:
- Buildings and land
- Equipment
- Patents, trademarks and goodwill
Liabilities
Liabilities refer to what your business owes. When filling out this section, list liabilities according to the due date.
Current liabilities are debts due within a year. These may include:
- Accounts payable (What you owe vendors or suppliers)
- Wages you owe to employees for hours already worked
- Loans
- Taxes
Long-term liabilities are those that you will pay back beyond the year. These include:
- Loans that don’t have an immediate 12-month due date
- Bonds issued by your company
Owner’s equity
Equity is whatever belongs to your small business and includes:
- Capital (money invested into the business)
- Private or public stock
- Retained earnings
Do You Need an Accountant?
While it may be tempting to skip getting a professional accountant to lower costs, it may be a good idea for startup small businesses to hire one during the first year of operation. This can help you accurately calculate the first handful of balance sheets, cash flow analyses, and profit and loss statements, which will set the stage for future financial reporting.
Accountants can also offer personalized consulting based on your finances, which can help you make smart budgeting and money management decisions moving forward. Rely on smart banking technology that allows you to integrate your accountant and bookkeeping software with your business bank account activity so you’re all on the same page.
