The financial soundness of your business lies in knowing that your assets and liabilities are accurately accounted for, and a balance sheet is a tool that can provide you with the information you need. Often called a “Statement of Financial Position,” a balance sheet pulls all of your company’s assets, liabilities and owner’s equity into one form to determine the your business’s current net worth.
A balance sheet is a major part of the greater financial statements report for any business.
All businesses needs to have a properly managed balance sheet that includes accurate details listing the unique assets, liabilities and equity of their specific industry.
Your assets are the resources you’ve acquired that have a measurable economic value.
Assets are typically divided into 2 categories:
Liquid – Cash or easily sold/converted to cash
Non-liquid – Not easily converted into cash assets
Your business has costs or obligations associated with operating. These costs are defined as liabilities and are usually owed to creditors, stockholders, etc.
Liabilities are divided into the categories of:
Current – Must be paid within a single year
Long Term – Payoff due outside of a single year cycle
After subtracting all of your business liabilities from the assets, you should now know your Equity or Shareholders’ Equity if incorporated. This can be considered the value of the company. The lower the expenses compared to revenue, the more equity you have.
A balance sheet provides a clear snapshot of your financial health to banks, investors, or shareholders at any given time. If you want to scale or grow your business and want to take out a loan to make it happen, then a bank or credit agency will look at the balance sheet to determine if you can repay the debt based on your business’s revenue.
Anyone with a stake in your business’s success or struggles will have a need to review a balance sheet such as:
At C.E. Thorn, CPA, PLLC, we have a great deal of experience in generating balance sheets and reviewing them in an advisory capacity. For nearly 30 years, we have provided support to local small businesses needing help with accurate bookkeeping and generating income statements.