Managing your business’s finances is no simple feat. Thankfully, there are tools that can help you organize all of your financial information in one place so you can revisit and analyze it as often as you need.
One of these tools is a balance sheet. A key financial statement that highlights your business’s financial standing, keeping an accurate balance sheet is crucial for keeping track of earnings and expenses, and ensuring financial health through close and consistent monitoring.
If you are interested in creating a balance sheet, this guide will define each element of the document so you know exactly what to include and how to include it.
What is a balance sheet?
Think of a balance sheet as “snapshot” of a company’s financial position at any given time. This snapshot includes what the company owns (assets) and owes (liabilities), as well as its capital. It outlines each component by breaking them down into categories, like current and fixed values, or short-term and long-term payments, to calculate the totals.
Comparing the two sections (assets versus liabilities) helps you understand your capital, or how much your business is currently worth. Continually reviewing this information is crucial to maintaining success.
Why you need a balance sheet
Financial stability is a priority for any business owner. Your balance sheet ultimately tells you how your business is performing and where you might need to make changes.
Your business sheet is also necessary when applying for credit or loans. You’ll likely have to provide the document to lenders so they can decide whether you qualify. Additionally, depending on the nature of your business, other individuals involved in your business, like investors, suppliers and even customers, might seek access to the information.
[For more on tracking your business's finances, see: The Key Statements of Financial Reporting.]
Your balance sheet ultimately tells you how your business is performing and where you might need to make changes.
Components of a balance sheet
As stated above, balance sheets consist of two sides (assets and liabilities) that help you define your equity. Here’s how to break down these three components:
Assets
Assets include a total of what your business owns. There are three parts to this section:
- Current assets: cash or its equivalent, including accounts receivable, inventory, prepaid expenses, securities (investments planned to sell) and notes receivable (amount of goods and services not paid regularly).
- Fixed assets: long-term investments, like equipment and buildings, that decrease in value over time, requiring depreciation for wear and tear.
- Other assets: neither fixed nor current, including intangible assets like goodwill, patents, copyrights and trademarks.
Liabilities
Liabilities include a total of what your business owes and can be broken into two parts:
- Current liabilities: amounts to be paid within a year, such as accounts payable, taxes, short-term loans, and lines of credit.
- Long-term liabilities: amounts due for longer than a year, such as long-term loans, mortgages, and employee benefits.
Equity
Essentially, your business’s equity is its net worth, or how much your company is worth should all its assets were sold and liabilities paid. This total is reached by subtracting what you owe from what you own (assets minus liabilities).
There are many resources, like free templates and samples, that can help you create a balance sheet. Your main concern should be keeping your document up to date, revisiting at least once annually, so you can stay on top of your finances. While it might seem complicated from a broad perspective, once you tackle each component, you’ll realize it is as simple as it is necessary.
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