As a business owner, staying on top of your books is crucial to the success of your business. Maintaining your books and preparing balance sheets is very important for tax, legal, and regulatory reasons. Using a balance sheet will help you to monitor assets and know the net worth of your company. A balance sheet consists of a cash flow statement, an income statement, and a statement of the shareholders equity. Keeping an eye on your financial statements will help you and others assess your company’s finances as a whole.
A balance sheet includes the following:
- Assets: This can be anything that your company owns that has value. This can include cash and/or cash equivalents, accounts receivable, prepaid expenses, inventory, real estate, investments, and other assets with value.
- Liabilities: This is anything that your company owes. These can be current or noncurrent. Some examples of liabilities are interest on loans, deferred tax liability, and long-term debt.
- Shareholders’ equity: This is anything that belongs to the shareholders of your company after you account for any liabilities. This is the difference between a company’s total assets and its liabilities. In many small businesses (sole-proprietorships), net assets are also known as owners equity.
Tips for when you are preparing a balance sheet:
- Calculate the shareholders equity and check that your sheet balances.
- Determine the reporting date and prepare your sheet in regular intervals.
- List your company’s assets, liabilities, and determine which are current and noncurrent. This helps you better understand what they both are and how to categorize them.
Three ways to use a balance sheet:
- Assess the company’s financial health and standing: Using a balance sheet can give you a clear picture of your company’s financial position at any point in time. With an income statement and a cash flow statement, a balance sheet can help you evaluate your company’s standing.
- Evaluate your company’s net worth for potential investors: Investors use a balance sheet to view a company’s net worth. They also use it to calculate financial ratios and determine a company’s financial standing, including debt-to-equity ratio and quick ratio.
- Compare your business to competitors: Having a balance sheet can help you determine how well you are doing against other businesses in your industry. If you really want to improve your company’s financial health, your balance sheet will help you determine which financial habits within your business need adjusting.
Paying attention to your company’s ins and outs when it comes to finances is very important. For a free download of a balance sheet template, click here!