What is a balance sheet?
A balance sheet is one of the most important financial statements for a business as it gives an insight into how financially sound your business is at any given moment. A balance sheet looks at these three elements:
- Assets – everything your business owns.
- Liabilities – everything your business owes.
- Owner’s equity – the net worth of your business.
Typically, businesses prepare balance sheets monthly or quarterly.
Why is a balance sheet important?
A balance sheet helps you understand your business’s ability to cover its commitments. These commitments might be short-term like paying your power bill next month, or long-term like paying off a loan over several years.
It’s often used alongside an income statement and cashflow statement to give you a comprehensive view of your business’s performance. If you’re thinking about applying for business finance or bringing on investors, a well-prepared balance sheet will show if your business is in a strong position to take on new financial obligations.
By comparing balance sheets from different periods, you can assess your company’s growth, spot trends, and identify any financial red flags. It’s a great way to track whether your business is growing, stagnating or struggling.
What’s in a balance sheet?
To put it simply, a balance sheet shows what you own, what you owe, and what’s left over. Here’s how you break it down:
Assets (what you own)
Assets can be divided into a few categories including:
- Cash – money you have on hand or in the bank
- Accounts receivable – money owed to you by customers
- Marketable securities – Investments that can easily be sold for cash
- Inventory – the products you have available to sell
- Fixed assets – long-term items like buildings, equipment, and machinery
- Intangible assets – non-physical items like trademarks and patents
- Long-term securities – investments held for more than a year
Liabilities (what you owe)
Liabilities are all the debts your business owes. These are split into short-term (due within the next year) and long-term (due after a year). Examples include:
- Accounts payable – money owed to suppliers
- Wages – salaries owed to employees
- Dividends payable – money owed to shareholders
- Income taxes – taxes owed by your business
- Debts – loans or lines of credit you need to pay back
- Lease obligations – any rent or leasing commitments
- Deferred tax liability – taxes that are due in the future from past transactions
Owner’s equity (what’s left over)
Owner’s equity is the amount of money that would be left over for the owners after all liabilities are paid off. It represents the value of the business. If you subtract liabilities from the total assets, you’ll get the owner’s equity.
How to set up a balance sheet
First, choose how often you’re going to create your report. Then, use our free Balance Sheet Template which contains all the assets and liabilities listed above. You can add to the template or remove lines that aren’t relevant to your business.
The template automatically calculates your owner’s equity so you can track the success of your business.
Whether you’re skilled with dog clippers or wire strippers, you’ll need to know the basics of a balance sheet if your business is going to thrive.
Remember to check out our Business Hub. You’ll find heaps of free resources and plenty of helpful information to keep your business humming.
