

Creating a balance sheet can be a challenging task for small business owners. Especially if you’re not schooled in finance and do not fully understand the in’s and out’s of financial statements, you may feel uncertain at first.
A balance sheet is one of the three primary financial statements used to monitor the health of your business, along with your cash flow statement and the income statement.
Your balance sheet should be included as part of your business plan. Think of it as a snapshot of your company’s financial position — what you own and what you owe — at a singular point in time, like at the end of a month, quarter or year.
The things you own are called assets, such as cash in the bank, inventory, vehicles, equipment, buildings, and accounts receivable, which is money customers owe you for sales made but not yet paid for.
The items you owe are called liabilities, such as accounts payable, which are purchases you have made but not yet paid for; taxes you owe, including sales, payroll, general purpose loans; and mortgages.
The difference between what you own (assets) and what you owe (liabilities) is called net worth or owner’s equity. In other words, after all the bills have been paid and all obligations have been satisfied, any value remaining belongs to the owners.
At a glance, the balance sheet will give you an idea if your business has the financial resources to expand and manage the normal swings in receiving and spending cash or if it needs immediate attention to bolster cash reserves.
In terms of operational management, the balance sheet provides insights where cash needs to be collected, inventory managed and bills paid.
To use a balance sheet to manage your business, first look at your current and fixed assets.
Current assets can be converted into cash within the next 12 months:
Fixed assets will be around for more than 12 months:
Now let’s look at your liability accounts.
The first three types of liabilities are known as current liabilities, as they are usually due within the next 12 months.
A financial ratio that combines current assets and current liabilities is called current ratio (current assets divided by current liabilities). The ratio should be greater than 1, which demonstrates you have the financial resources to pay your bills.
The third section of the balance sheet shows your net worth.
Besides the personal satisfaction of knowing you are worth more each year, bank loans often have stipulations that net worth must be kept at a certain level, so you need to track your net worth to ensure you’re not in default.
Here’s an example of a simplified balance sheet that shows a snapshot of a business on March 31, 2016:
Current Assets Current Liabilities
Cash $ 75,000 Accounts Payable $ 50,000
Accounts Receivable $125,000 Taxes Owing $ 20,000
Inventory $ 50,000
Total Current Assets $250,000 Total Current Liabilities $ 70,000
Fixed Assets Long-Term Liabilities
Vehicles, Equipment $100,000 Loans and Mortgage $100,000
Net Worth $180,000
Total Assets $350,000 Total Liabilities and Net Worth $350,000
Note that at $350,000, total assets equal total liabilities, plus net worth. From this example, we see that the $350,000 in assets has been financed with $170,000 from others and $180,000 from the owners.
Key Lessons
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