How to Make a Balance Sheet for a Small Business
Gain vital insights into your small business's financial health. Understand how to accurately portray your company's economic standing.
A balance sheet offers a clear financial snapshot of a small business at a specific point in time. It details what the business owns, what it owes, and the owner’s stake in the company. This financial statement is a tool for understanding the financial health of a business.
The balance sheet provides a static view of its financial position, unlike an income statement or cash flow statement which cover a period of time. This snapshot is valuable for making informed decisions, tracking financial progress, and assessing the ability to meet financial obligations.
Understanding the Core Elements
A balance sheet is built upon three components: assets, liabilities, and owner’s equity. These categories represent the financial resources, obligations, and ownership claims of a business.
Assets are economic resources a business owns. These can be tangible items, such as cash, accounts receivable (money owed to the business by customers), inventory, and equipment. Intangible assets, like patents or copyrights, are also included. Assets are typically categorized as either current assets, convertible to cash within one year, or non-current (long-term) assets, which take longer to convert.
Liabilities represent financial obligations a business owes to outside parties. Common examples include accounts payable (money owed to suppliers), wages payable, taxes payable, credit card debt, and loans. Liabilities are classified as current liabilities if due within one year, or non-current (long-term) liabilities if due beyond one year. Mortgage payments and long-term business loans are typical non-current liabilities.
Owner’s equity, also known as shareholder’s equity or net worth, represents the residual interest in a business’s assets after all liabilities have been deducted. This figure includes the initial capital invested by the owner and any accumulated retained earnings, which are profits reinvested back into the business. Owner’s equity increases with profits and owner investments, and decreases with losses or withdrawals by the owner.
Collecting Necessary Financial Data
Gathering precise financial figures for each balance sheet component requires reviewing various business records. The accuracy of your balance sheet depends on the completeness and correctness of the data collected from these sources.
Bank statements are a primary source for determining cash and cash equivalents, which are current assets. These statements provide the exact balance of your checking and savings accounts at the balance sheet date. Transaction histories from these statements also help identify cash inflows and outflows for other asset and liability accounts.
Credit card statements are essential for identifying current liabilities, specifically outstanding balances owed to credit card companies. These statements detail purchases made on credit, representing short-term obligations.
Loan agreements provide information for both current and non-current liabilities. These documents specify the original loan amount, interest rate, and repayment schedule. The portion of the loan due within the next 12 months is a current liability, while the remainder is a non-current liability.
Invoices, both issued to customers and received from suppliers, are vital for accounts receivable and accounts payable. Outgoing invoices indicate money owed to your business (accounts receivable), while incoming invoices detail amounts your business owes to suppliers (accounts payable).
Payroll records are necessary for calculating accrued wages and salaries payable, which are current liabilities. These records show the total amount earned by employees but not yet paid as of the balance sheet date.
Asset purchase documentation, including receipts, bills of sale, and financing agreements, is used to determine the value of fixed assets like equipment, vehicles, or property. These documents establish the asset’s cost and any associated debt. Depreciation records also contribute to the accurate valuation of fixed assets over time.
Assembling the Balance Sheet
The structure of a balance sheet is based on the accounting equation: Assets = Liabilities + Owner’s Equity. This equation must always remain in balance, meaning total assets must equal the combined total of liabilities and owner’s equity. If the equation does not balance, there is an error in the calculation or data entry.
To assemble the balance sheet, list all current assets first, typically in order of liquidity. This section includes cash, accounts receivable, and inventory. Following current assets, list non-current assets, such as property, plant, equipment, and any long-term investments. The sum of these two categories will be your total assets.
Next, detail the liabilities, starting with current liabilities, which are obligations due within one year. This includes accounts payable, short-term loans, and accrued expenses like unpaid wages or taxes. After current liabilities, list non-current liabilities, such as long-term debt and mortgages. The total of current and non-current liabilities represents your total liabilities.
Finally, calculate and list the owner’s equity. This section includes the owner’s capital contributions and retained earnings. Retained earnings represent cumulative profits kept in the business rather than distributed to the owner. Owner’s equity is derived by subtracting total liabilities from total assets.
The final step involves verifying that the accounting equation holds true. Total assets should exactly match the sum of total liabilities and total owner’s equity. A clear layout with distinct sections for assets, liabilities, and equity makes the document easy to read and understand.
Interpreting Your Balance Sheet
Once complete, the balance sheet offers insights into your small business’s financial health at a specific moment. Each section communicates important aspects of your company’s financial standing, helping in understanding the business’s overall position.
A substantial cash balance among current assets suggests strong liquidity, indicating the ability to cover short-term obligations easily. Conversely, a high volume of accounts receivable might indicate effective sales but also potential cash flow issues if customers pay slowly. For liabilities, a large proportion of current liabilities compared to current assets could signal a liquidity challenge.
Reviewing the relationship between assets, liabilities, and equity provides a broader perspective on your business’s financial structure. A high debt-to-equity ratio (total liabilities divided by owner’s equity) suggests reliance on borrowed funds. Conversely, a strong owner’s equity position relative to liabilities indicates a solid financial foundation. These relationships are often expressed through financial ratios, such as the current ratio or debt-to-equity ratio, which provide benchmarks for assessing liquidity and solvency.