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How's business? For small business owners, it's not always easy to know. Sales may be up and you may have recently expanded. You weathered the pandemic but now you have loans to pay off. You've invested your hard-earned dollars in the business, but after accounting for loans and expenses, it's hard to say how much of the business is really yours.
Having a balance sheet can help you find answers. A balance sheet shows the balance between your assets, liabilities and equity. They are one of many financial statements business owners may run periodically to check up on the health of their companies. You may need one to file taxes, secure a loan, take on investors or sell.
What Is a Balance Sheet?
A balance sheet shows how much your business has in cash and assets, how much debt your company has and how much equity you have as a business owner. Balance sheets are typically updated monthly, quarterly or annually, and may be helpful in a number of different scenarios:
- Planning or making decisions about growth and spending
- Valuing a business when you're ready to sell or take on investors
- Demonstrating your assets and equity to potential lenders
- Preparing federal taxes for your C corporation
- Getting a quick snapshot of your business's debt ratio and overall health
A typical balance sheet shows your current, fixed and other assets; current and long-term liabilities; and owner equity. Use your balance sheet to figure out how reliant your company is on debt, how easily you could pay off debt in an emergency, what your company's net worth is and what your capacity might be for expansion. Do you have room to take on additional debt? Are your assets dwindling over time? Is your business getting stronger year over year? Your balance sheet gives you data to help answer these questions.
How Do You Create a Small Business Balance Sheet?
If you're planning to use your balance sheet to raise investment money, secure a loan or include with your tax return, you may want to have an accountant prepare it for you to ensure your categories are set up and calculated correctly and that your assets, liabilities and equity balance out. You may not need your accountant's help every time once you've established a template, though. But if you're new to preparing financial statements (and accounting, for that matter), having an accountant's input at the start can be helpful.
Another option is to use small business accounting software like QuickBooks. These programs typically include built-in templates for balance sheets. If you use accounting software to maintain your books, your program may be able to use information you've already input as part of your regular accounting to help populate a balance sheet.
Alternatively, consider downloading a balance sheet template from SCORE or another source of financial statement templates. A template provides simple instructions for assembling and summarizing your assets, debts and owner's equity, and presents them using a ready-to-fill worksheet. Although every business is unique, here are a few of the line items you'll use:
- Current assets: Bank account balances, accounts receivable, inventory and prepaid expenses
- Fixed assets: Equipment, furniture, fixtures, leasehold improvements, land and buildings. The value of fixed assets is subject to depreciation.
- Other assets: Intangibles, such as goodwill
Liabilities and Equity
- Current liabilities: Accounts payable, interest and taxes owed, short-term notes or current portions of long-term debt
- Long-term debt: Bank loans, stockholder notes and other long-term debt. Subtract any short-term portion of debt that is included in current liabilities.
- Owner's equity: Capital invested and retained earnings (profits), both beginning and current
Balance Assets with Liabilities and Equity
Use this core equation to make your balance sheet work:
Assets = Liabilities + Equity
Say you have total assets of $60,000 and total liabilities of $45,000. Your equity must equal $15,000 for your balance sheet to balance out. The balance sheet equation breaks down what portion of your company's assets belong to you (equity) and what portion is taken up by liabilities.
Why Is It Important to Have a Balance Sheet?
Your balance sheet can give you a picture of how healthy your business is—whether your liabilities are out of balance with your equity, for example—at any given time.
Here's a quick list of potential uses for your balance sheet:
- Use your debt-to-equity ratio to understand leverage. Divide your total liabilities by shareholder equity. In our example above, total liabilities ($45,000) divided by equity ($15,000) equals 3: Your company's liability is three times shareholder equity.
- Find out whether short-term assets cover short-term liabilities. Calculate your quick ratio by dividing short-term (current) assets by current liabilities. If your ratio is 1 or greater, your assets cover your liabilities. If your ratio is less than 1, you would not be able to pay current liabilities out of your cash flow and liquid assets.
- Track the health of your business over time. Compare balance sheet results monthly or year over year. Are you gaining assets and reducing debt? Has your equity grown? Are your finances positioned to invest in growth?
- Valuate your business for investors or buyers. Although determining the value of a company to investors or buyers is complex, your balance sheet shows a version of your company's net worth.
- Share it with lenders to demonstrate your company's financial health. Being able to create and talk about the details on your balance sheet also demonstrates your financial literacy.
- Include it with your federal taxes. C corporations must file a balance sheet with their corporate tax return. Having it ready to include makes tax time much easier.
The Bottom Line
Knowing how your business is doing isn't all subjective. Financial statements like your balance sheet put numbers behind key measurements of your business's success. That's useful to lenders, investors and buyers. It's also helpful to you as a business owner.
If you're planning to use a balance sheet as part of a lending application, you may want to learn more about checking and monitoring your business credit to give you the best chances of securing funds.