As a small business owner, it's crucial that you're aware of the state of your business's finances. If you don't make it a priority, you could put your company's future at risk. Many small business owners use balance sheet examples to determine what their company's finances are currently, and in turn set the right financial goals.
In its basic definition, a balance sheet is a financial statement that details a business's assets, liabilities and working capital over a specific length of time.
A balance sheet shows what your business possesses, what it owes in terms of bills and other expenses and how much money is being invested by your stakeholders. By fully understanding these aspects of your business's finances, you can ensure that you're managing your money responsibly.
Even though there are clear benefits to using a balance sheet, many small business owners forgo the balance sheet exercise because they think their business is "too small." In reality, all businesses (regardless of size) should be using balance sheets to track their finances. In this post, we'll explain what a balance sheet is and what the benefits are, so you can start using this helpful financial formula.
Here are two prime balance sheet examples to use while following along below:
How to follow a balance sheet
When you follow the balance sheet formula, you're calculating the following:
Assets = Liabilities + Equity
This equation can also be written as:
Shareholder’s equity = Assets – Liabilities
It may seem like a straightforward formula, but you should make sure that you fully understand what assets, liabilities and equity/net assets are, and how they affect your overall financial health.
Most financial professionals recommend updating your balance sheet at the end of each fiscal year.
This way, you can review your business's progress, and use that information to make important decisions such as:
- How much inventory to buy
- Whether you need to apply for a loan
- If you need to cut back on certain expenses
Don't let more than 12 months pass before updating your balance sheet. You should be keeping an up-to-date account of your business's finances, and as you know, they can fluctuate quickly!
Keep reading to learn more about what you need to know when creating your own balance sheet example.
What are assets?
Your business's assets are everything you own. This includes money, but includes other things as well:
- Bank accounts
- Grants you've received
- Accounts receivable (money due to you)
- Physical assets like real estate, inventory and equipment.
But it's crucial that you understand the difference between your current and non-current assets, because they can greatly affect your overall finances.
Your current assets are cash and anything else that can be turned into cash within the next year.
Examples of current assets are accounts receivable, inventory and liquid assets. In comparison, your non-current assets might consist of land, trademarks and equipment. These assets are considered long-term assets because they aren't easily convertible into cash.
What are liabilities?
While your assets are what your business owns, your liabilities are what you owe to outside companies or vendors. Examples of liabilities are:
- Rent payments
- The wages you owe employees
- Customer prepayments
- Anything else you owe
Looking at your liabilities is important because even if you have significant assets, you need to consider the amount of money you owe too.
Like the previous section, which discussed current vs. non-current assets, you should examine your current and noncurrent liabilities as well. Your current liabilities are expenses that you plan to pay off at some point during the next year, while noncurrent liabilities (also called long-term liabilities), are obligations that don't need to be paid within 12 months.
What are equity/net assets?
Now that you understand your business's assets and liabilities, there's one more piece to the puzzle: your business's equity/net assets. This part is crucial, because it reveals how much your business is ultimately worth.
When you know your business's net worth, you'll be able to definitively answer the question "Is my business going to be OK?"
This is why following a balance sheet is key. It can give you peace of mind that your business is functioning successfully and is able to maintain its operations.
What are the benefits of using a balance sheet example?
Creating a balance sheet has several advantages. Here are the three main ones.
1. It can be used when applying for loans
When you pursue additional financing (business loan, line of credit or cash advance), having a balance sheet can help you provide your lender with a snapshot of your business's financial health. This can be useful to the lender as they confirm that your business will be able to responsibly repay them.
Related: How to write a business plan simply
2. You can attract outside investors
Your balance sheet can also be used to attract investors to your small business. When an investor examines your balance sheet and sees that your business has efficient operations, responsibly pays off liabilities and owns significant assets, they'll be more interested in backing your business.
3. You’ll know your business's financial health
When you maintain a balance sheet, you can get a clear view of the state of your business's finances.
As you use a balance sheet over time, you can compare present balance sheets to past versions to look for patterns or areas of concern.
Without a balance sheet, you might overlook major financial problems that could put your business's future in jeopardy.
Start using a balance sheet today
Preparing and reviewing your company’s balance sheet can help you be a better entrepreneur, one who truly understands how your business operates and where improvements can be made. In addition, your balance sheet can be used to show stakeholders and potential lenders the state of your business's finances.
In addition to using a balance sheet, your business might benefit from creating other reports, like income statements and cash flow statements. Combined with your balance sheet, you can use these formulas to get a clear picture of how your business is doing.
After reading this post, we hope that you're excited to start using your own balance sheet. You might be surprised at how much it can help you grow your business!