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E

very growing business needs a reliable way to keep track of its financial vital signs. The document that allows an entrepreneur to record and track these health metrics is called a balance sheet. It tracks your small business's financial standing, enabling you to make decisions and attract investors.

It's relatively simple to set up a balance sheet. Let's explore what's involved and how having a balance sheet can benefit your business long-term.

## What is a balance sheet?

A balance sheet is a document that outlines a company's assets, liabilities, and owner equity. It's usually pulled together at the end of a reporting cycle — for example, every quarter or every year.

### Components of a balance sheet

• Assets: These are items of value that a company owns. This can be intellectual property, including trademarks and patents, or tangible goods like real estate, equipment, and physical products.
• Liabilities: This refers to debts that a company must repay, whether those are owed to banks, venture capital firms, individual investors, creditors, vendors, or employees.
• Owner's equity: This is the cash that a company would be left with if all of its assets were sold and its debts paid. This leftover money belongs to the company's shareholders, or the owners.

### Purpose of a balance sheet

A balance sheet is meant to reveal a company's assets. Assets are possessions of value that a company holds, such as real estate, equipment, investments, or even cash. In a balance sheet, the assets should "balance" the sum of a company's liabilities and its shareholders' equity, demonstrating that, in an emergency, the company has enough assets that could be turned into cash to cover its debts and liabilities.

Having a balance sheet in place will allow you to see what your company is worth and navigate decisions about what to invest in, with whom to partner, and how to fuel future growth.

## How to create a small business balance sheet

A balance sheet has three main components: assets, liabilities, and owned equity. Assets come in two forms — current and noncurrent. Current assets refer to the tangible capital a business has access to, such as incoming revenue, equipment, and real estate. On the other hand, noncurrent assets are the far less tangible capital tied to a business, like pending patents.

Examples of current assets include but are not limited to:

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

Examples of noncurrent assets include but are not limited to:

• Patents owned by the company
• Other types of intellectual property

If your business has commitments to uphold, such as obligations to repay lenders, then it has liabilities. These should be categorized into current and long-term.

Examples of current — already known, or existing — liabilities include but are not limited to:

• Accounts payable
• Bank and other fees
• Bills
• Income taxes
• Operating expenses

A long-term liability is a bill that lingers for more than one year, constituting long-term debt. For example, a loan that allows you to buy a piece of property or fund high-cost initiatives would be considered a long-term liability. Any pending legal action, such as a lawsuit, is another type of liability.

### Calculating equity

If you paid off your company's liabilities, assets would remain, and the value of those is referred to as owner's equity.

### Creating the balance sheet

Use these tips to maximize the effectiveness of a balance sheet for your small business. Our free balance sheet template is also a great resource.

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

#### 1. Gather financial information

Perhaps the most crucial step is gathering all the financial information you'll need to fill out 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.

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.

#### 3. 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 double-check along the way.

## Importance of regularly updating your balance sheet

A balance sheet can be a highly useful tool for any small business if kept up-to-date and used regularly. Specifically, it can help you with:

• Better decision-making: Every business owner wants their company to be profitable. By using a balance sheet, you ensure there's a structure in place for reviewing both profits and losses and figuring out how to make choices in pivotal moments.
• Obtaining funding: You need to communicate with lenders and investors about your company's financial standing. Your backers will want to know whether you're in a position to repay debts quickly, and they'll look for insight into how you'll invest their money and how quickly they could see a return on it.
• Easier risk assessment: Does your business carry too much debt? Do you need to keep more cash on hand? A balance sheet helps answer these questions by being a central source of data for your assets and liabilities.
• Clarity during tax season: A balance sheet might be required for your company's tax return. Even if it isn't, the insight it provides about your company will help you account for expenses and likely prove helpful if you find yourself on the receiving end of an audit.
• Identifying business improvements: At the end of the day, you want your business to grow. That means you need to know where your financial strengths and vulnerabilities are to determine when you can afford to make investments and when you need to play it safe for a while.

### How often to update your balance sheet

You'll need to determine what reporting timeline works best for your business. Standard choices are by month, quarter, or year. When deciding on a timeframe, consider how often you incur significant expenses or acquire new assets. If your transaction volume is high, you're best advised to update your balance sheet every month. It's also wise to consider a quarterly update at a minimum, especially if you pay taxes at the end of each quarter.

### Benefits of keeping an up-to-date balance sheet

Using a balance sheet helps you gain important insights to help you make decisions about the status quo and the next steps for your business. The more you practice maintaining a balance sheet, the more it can guide you toward choices that will pay off for your company.

## Takeaways

A small business balance sheet provides a growing business with an organized set of accessible insights. Start building your balance sheet today to begin making more informed decisions and preparing your company for new opportunities to grow. Lean on Novo’s best-in-class business checking products as you look to take your company to its next level.

Novo Platform Inc. strives to provide accurate information but cannot guarantee that this content is correct, complete, or up-to-date. This page is for informational purposes only and is not financial or legal advice nor an endorsement of any third-party products or services. All products and services are presented without warranty. Novo Platform Inc. does not provide any financial or legal advice, and you should consult your own financial, legal, or tax advisors.

Updated
June 14, 2022
in
Banking 101
category

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