balance sheet is a financial document essential to any business operation, big or small. It walks through your company's financials, including assets, liabilities, and owner equity.  A balance sheet for your small business not only provides insight into your financial standing but can also help guide upcoming decisions and help you secure future funding.

Creating a balance sheet isn't complicated, but it includes several key components vital to your company's financial health. Here's a look at balance sheets, how they work, and how to create one that will benefit your business long-term. 

What is a balance sheet? 

A balance sheet is a financial statement of a business’s assets, liabilities, and owner equity. It provides insight into a company's financial standing, including its value. Business owners  typically prepare balance sheets at the end of a reporting period, such as quarterly or annually. 

How balance sheets work 

Balance sheets contain two parts: company assets and liabilities and the owner's equity. Total assets can be divided into current assets and noncurrent assets.

Current assets can include:

  • Cash
  • Accounts receivable
  • Long-term investments
  • Bonds
  • Property
  • Buildings
  • Equipment and machinery
  • Other miscellaneous assets 

Noncurrent assets can include:

  • Patents 
  • Copyrights
  • Other intangible intellectual property 

Liabilities are your business' financial obligations, both now and in the future. You should break down your total liabilities into current liabilities and long-term liabilities. 

Current liabilities include: 

  • Accounts payable
  • Bank and other fees
  • Bills
  • Income taxes
  • Operating expenses
  • Short-term business loans

Long-term liabilities refer to expenses due after more than one year, or long-term debt. An example includes a long-term capital loan to purchase property or for larger capital projects. Another type of liability to consider is contingent liabilities. These are potential liabilities, such as an ongoing lawsuit against your business. 

Owner's equity refers to the net worth of a small business. Typically, you list equity on a balance sheet after liabilities. Equity is the amount left from your business's assets after paying off all liabilities.

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What are the benefits of using a balance sheet? 

A balance sheet provides invaluable information for your small business. As a business owner, using a balance sheet can help you grow and scale your business in several ways. 

Better Decision-Making

The primary reason for starting a business is to make a profit. The balance sheet indicates whether your company is making losses or profits for directors to determine future steps. The balance sheet acts as a decision-making tool.

Obtaining Funding 

A balance sheet gives lenders, investors, and other interested parties an idea of the company’s financial position. It provides lenders insight into your likelihood to repay debts promptly. It also helps investors understand how you will use your investment and when they can expect to see a return. 

Easier Risk Assessment

A balance sheet lays out all of your assets and liabilities in one document, giving you a clear picture of where your business stands short- and long-term. Depending on your assets and liabilities, you may need to adjust to lower your debt ratio or secure additional working capital.  

Clarity During Tax Season

Some business types must submit a balance sheet as part of their tax return. However, any business can benefit from keeping an accurate balance sheet during tax preparation. It will help you or a tax professional prepare an accurate tax return. Correct financial records will also help if your business is subject to an IRS audit. 

Identifying Business Improvements

Your goal is to make a profit. Your balance sheet lets you know where your business is profitable and where it isn't. You can analyze your expenses and assets to see if you need to make adjustments to improve your profits. 

How to create a balance sheet for your small business

You can search for a simple balance sheet template online or easily create your own using a spreadsheet program like Excel or Google Sheets. You don't need to make it too complex to start; you can adjust it anytime to fit your needs.

All balance sheets should use the following equation: Assets = Liabilities + Owner’s Equity.

Follow the steps below to create a balance sheet you can use for your small business. 

1. Choose a reporting sequence

Determine how often you want to report financial information on your balance sheet. Typically, businesses report financial information on a monthly, quarterly, or annual basis. How frequently you choose depends on your bandwidth and your frequency of expenses and assets. If you’re making many purchases or receiving a lot of income, you may want to report monthly. We recommend reporting at least quarterly so you can use it for your quarterly taxes, but you’ll know best if an annual report will be better for your small business. 

2. Gather financial information

Perhaps the most crucial step is gathering all the financial information you'll need to fill in your balance sheet. That includes all financial documents, including receipts, invoices, expense and sales reports, and anything else you'll need to fill in your business's assets and liabilities. 

3. Fill out your spreadsheet

Enter the amounts into your balance sheet. Populate the assets in the spreadsheet's left column, and use the right column for the liabilities and owner's equity. Utilize appropriate titles, categories, and sub-categories to make your balance sheet easier to read and analyze. Our balance sheet template is free for you to use

4. Verify that it balances out 

Ultimately, the two sides of your balance sheet should balance out. Make sure that's the case before moving forward. If not, determine if an error occurred, and be sure to double-check along the way.

Tips for using a balance sheet for your business 

Use these tips to help you maximize the effectiveness of a balance sheet with your small business. 

Keep good records.

Your balance sheet only works if the financial information is accurate. Take measures to collect and record the necessary data and documents you'll need to fill out your balance sheet correctly. Consider keeping digital records for any paper documents you receive as an extra safeguard.

Classify your assets.

Break down your assets and liabilities into current and long-term categories. This action will give you a better idea of where you stand now and in the future and allow you to make adjustments as needed. 

Always make sure everything adds up.

Your balance sheet should always balance out (it's even in the name). Assign a trusted staff member or members to create and manage your company's balance sheet, or do it yourself if you feel you have the ability.  

Use your balance sheet. 

A balance sheet is only helpful if you use it to inform both long- and short-term business decisions. Update and analyze your balance sheet regularly, and use the insight it provides into your business’s financial standing to better position your business for growth and success. 

The Takeaway

Balance sheets are essential for financial reporting in a small business or startup. Business owners can benefit from this tool from becoming more organized to making better financial decisions. Create a balance sheet using the template provided to help propel the growth of your business. 

This page is for informational purposes only and is not intended to be relied upon as legal, financial or accounting advice. Please consult your own professional if you have any questions.

June 14, 2022
Banking 101