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How to Create and Use a Balance Sheet
If you have a business and would like to take out a loan, hire more people, or simply determine the financial health of your organization, you need an immediate snapshot of your financial status. One of the most effective ways to do this is with a balance sheet. If you’re not sure what a balance sheet is or how to create one, our small business accountants in Raleigh are sharing everything you need to know.
What Is a Balance Sheet for Businesses?
This sheet is different than a cash flow statement. A balance sheet is a statement of present financial position. It shows your current liabilities subtracted from your current assets to provide an accurate look at the worth of your business.
Current assets include:
- Cash and money in the bank;
- Inventory (which can be sold for cash);
- Accounts receivable (because you know you will receive money in the near future);
- Equipment and supplies (that can be sold if needed, like a computer);
Current liabilities include:
- Rent and utilities
- Loan balances for your business
- Accounts payable
What You Can Learn from Your Balance Sheet
Your balance sheet can provide you with an exact look of the net worth or book value of your business. You can use this to show shareholders or partners the health of the business, or, if you have a small business, banks and lenders will need to see this as part of your financial statements to determine if you’re a good risk for a loan.
You can also look at your balance sheet and determine what problems you may be facing with your business. For example, if you’re operating at a negative - ie: you have more liabilities than assets, you can see exactly what your liabilities are. If you’re carrying a lot of debt, create a plan to get it paid down more quickly, or if you’re paying out more in rent, maybe moving to a smaller, less expensive location will be beneficial. Your assets require just as close of scrutiny because they determine how quickly you can convert them into cash. Some other examples of what your balance sheet teaches you includes:
- Debt to equity ratio
- How quickly accounts receivables are being paid;
- If on-hand cash is increasing or decreasing;
- Percent of tangible assets;
- How long it takes to sell inventory;
Are Balance Sheets and Income Statements the Same?
When it comes to financial statements, your balance sheet and your income statement are two different entities. The income statement shows your revenue and expenses - how much money is going out and how much is coming in and allows you to determine whether your company is operating at a profit or a loss. The balance sheet shows your value as a whole. It’s possible to have a positive amount of incoming cash but a negative net income such as if you took out a loan but didn’t make much by way of sales. Using your income statement and balance sheet empowers you to make the best decisions for your business.
How to Create and Use Your Balance Sheet
Creating a balance sheet doesn’t need to be complicated. In one column, you’ll need your assets added up, preferably in order from easiest to access (cash) to most difficult to access (selling equipment). In the next column, add up your liabilities, including the total amount of debt (not your debt payment). If you have equity in things like stock, that would go in a third column, but most small businesses operate simply with assets and liability.
Once you have your assets added in one column and your liabilities added in another, you need to subtract the liabilities from your assets to determine your current net worth. From there you can analyze the numbers and get a clearer view of your status.
Let Our CPAs in Raleigh Generate Your Financial Statements
If you’re unsure or simply don’t have time to generate financial statements for your business, our small business accountants can help. Call 919-420-0092 or fill out our online contact form to learn more.
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