A Balancing Act: How Balance Sheets Can Help You Better Understand Your Business

As a small business owner, it’s important to track assets and liabilities to ensure your company’s financial health. In previous posts, we’ve looked at various elements of these two broad categories: accounts payable, accounts receivable, revenue and expenses…

Today, we’re going to put all that information together into a balance sheet: a detailed record of assets and liabilities that will give you a clear picture of how your business is operating and help you manage future financial decisions.

The main components of a balance sheet are the assets and liabilities (more on that below), but it’s the difference between the two, called equity or shareholders’ equity, that will give the real bottom line. It will show how much your company is worth, which is especially important if you have investors or are looking to secure a bank loan since it shows your track record with paying off liabilities.

Having a balance sheet can also keep you from running into financial trouble by helping you decide if/how much you can invest into growing your business.

So let’s have a look at the main components of a balance sheet.

Assets

Assets represent the money you earn. Both assets and liabilities are generally divided into long- and short-term items. Each of the items within these categories should have its own column in the sheet.

Short-term assets are those you expect to sell or turn into cash within a year. They include items like accounts receivable, inventory, and cash.

Long-term assets, on the other hand, won’t get converted to cash within a fiscal year. So look to record things like equipment and office space, but also investments and intellecual property items such as trademarks and copyrights.

Liabilities

Again, liabilities (representing money you owe) are divided into short-term and long-term and should be recorded in detail on your sheet.

Short-term liabilities include things like accounts payable, interest, taxes, wages, and short-term debt. Under long-term liabilities, you should track items such as loans, leases, deferred taxes, and (if you have employees) pension and post-retirement healthcare plans.

Equity

This is where we put it all together. As I mentioned earlier, whether or not you have shareholders or investors, the equity section of the balance sheet is extremely valuable for calculating your business’ efficiency and profitability.

To calculate equity, you’ll subtract the liabilities from the assets. This section of the balance sheet can be as simple or complicated as you need. For some of you, it might include information on your company’s stock value; at the very least, it will include a figure showing your retained earnings.

If this all sounds hopelessly complicated, fear not. Most accounting software has the option to help you create a balance sheet from your recorded data. If not, you can also find balance sheet templates suitable for small business owners. If you use Microsoft Excel, there’s a balance sheet template you can select when creating a new document. You’ll also find many useful financial templates at TemplateLab.

And as always, I’d love to hear back from you once you’ve tried your hand at creating a balance sheet! Here is my Bookkeeping workbook -https://mmaccounting.consulting/bookkeeping-starter-kit