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If you run your own business, having at least a general understanding of small business accounting basics and important financial ratios is important. You’ll need to understand the money coming in and going out of your accounts, and you’ll have to have a handle on your accounting software.One of the financial statements you should be sure you understand is your small business’s balance sheet. Let’s take a deeper dive into what it is, why it’s important to have, and what it looks like.
What Is a Balance Sheet?A small business balance sheet is a snapshot of your business’ assets, liabilities, and equity (if applicable). Reviewing it gives you a general idea of where your money (and debts) lie so you can gauge your cash flow.
AssetsAssets are listed on your balance sheet.What exactly is considered an asset? An asset is anything that holds value and can be turned into cash, sold, or used.Here are some examples of assets:
Note that if you lease equipment, you won’t be able to list it as either an asset or a liability. If you’re considering leasing vs purchasing equipment, carefully weigh the pros and cons of each option.
- Office equipment (computers, machinery, etc.)
- Real estate
- Commercial vehicles
- Accounts receivable
LiabilitiesAlso included on your balance sheet are your business’s liabilities. These include debts you owe to others such as the following:
Keep in mind that your balance sheet may look different depending on whether you use the cash or the accrual accounting method. If you use the cash accounting method, you won’t record revenues or expenses until the cash is actually received or paid out. If you use the accrual method, you record revenue or expenses when the product is delivered or the item you ordered has been received.
- Accounts payable
- Loan payments
EquityIf you have shareholders, their equity will also appear on your balance sheet. It will also list the value of a share of stock.If you don’t have shareholders, you still include owners’ equity in the balance sheet.Ideally, your accounts should balance. That is, your assets should equal your liability plus your equity. If they don’t, it’s important to figure out why not.
Income Statement vs Balance SheetAnother financial statement you might have heard of is the income statement. It has some similarities with the small business balance sheet, but there are notable differences.
In a nutshell, the balance sheet is used to see how a company is doing and whether it has enough assets to cover its liabilities. The income statement is a bit simpler and looks at a snapshot of financial health for a moment in time, often a year. It can be used to course-correct if there are financial concerns.
|Income Statement||Balance Sheet|
|Reports revenue, expenses and profit or loss||Reports assets, liabilities, and shareholder equity|
|Helps determine gross margin and net income||Measures cash flow and financial wellbeing of company|
Do Small Businesses Need a Balance Sheet?The short answer is that it depends. If your company brings in revenues of more than $250,000, the IRS may require you to complete a small business balance sheet when you file your taxes. If your company makes less than that, it’s not required. If you want to take out a small business loan, lenders may ask to see your balance sheet when you apply. If you plan to sell your company, you’ll also need one.If none of those apply, it can still be wise to look at your balance sheet, as it’s helpful in calculating cash flow and giving you the big picture of how your company’s doing. If you have more liabilities than assets, for example, you might work to pay down that debt or find other avenues to bring in revenue and get the two back in balance.
Writing a Balance Sheet for a Small BusinessReady to create a simple balance sheet for your small business’s use? You have a few options.
Start With What You’ve GotIf you already use accounting software, you may have the ability to create a balance sheet statement directly from that software. If you’ve accurately input your income and expenses, the software will automatically generate a report that includes your assets, liabilities, and equity.
Ask Your AccountantIf you have an accountant who manages your “books” and files your taxes, they can help you generate a balance sheet and even explain it.
DIY Your Balance SheetIf the other two aren’t options, you can generate your own balance sheet. There are templates you can find online to use, or you can create one in a spreadsheet. Make sure to include both long- and short-term assets and liabilities, as well as equity.
Small Business Balance Sheet ExampleNow let’s look at an example of a balance sheet for a small business so you get a sense of what yours might look like.
This sample balance sheet small business resource gives you a general idea of what yours might look like. The key is getting the assets and liabilities to balance.
|Current Assets||Current Liabilities|
|Accounts receivable||$7,500||Accounts Payable|
|Total Current Assets||$23,820||Short-Term Loans Payable|
|Total Current Liabilities|
|Property & Equipment|
|Office Equipment||$5,000||Long-Term Liabilities|
|Real Estate||$25,000||Long-Term Debt|
|Total Property & Equipment||$30,000||Total Long-Term Liabilities|
Pro Forma Balance SheetJust as a balance sheet gives you an idea of the health of your business right now, a pro forma balance sheet can give you an idea of what your finances will look like in the future.Why should you care? If you can project how much money you have in the future, it can help you make important financial decisions, like whether to expand your business, increase your small business marketing budget, or take on a loan.You can create a pro forma invoice for a five-year period rather than the one year you typically look at with a traditional balance sheet.
Funding for Small BusinessesNow that you understand how to make a balance sheet for a small business and interpret it, you should have a better handle on your finances.Ready to grow? Making small business loan comparisons with Lantern by SoFi is fast and easy, and you can see offers from multiple lenders in our partner network all in one place.
The TakeawayWhen you’re a busy small business owner, taking the time out to figure out your small business’s balance sheet can seem like an unnecessary chore. But not only can it help you when you’re looking for a loan, in some cases you may be required to do it. And having your financial information organized in your balance sheet can help you better understand where your money’s coming from and going to so that you can manage it better.
Photo credit: iStock/kate_sept2004
About the Author
Susan GuillorySu Guillory is a freelance business writer and expat coach. She’s written several business books and has been published on sites including Forbes, AllBusiness, and SoFi. She writes about business and personal credit, financial strategies, loans, and credit cards.