According to the U.S. Small Business Administration report found that only about half of all small businesses survive five years. Why is this? The truth is, many small businesses fail to keep their financial information organized. If you are looking to stay in a business using a balance sheet may be the right choice for you.
What is a Balance Sheet?
A Balance Sheet is a financial statement that includes assets, liabilities, equity capital, total debt, and more at a point in time. The balance sheet includes assets on one side and liabilities on the other. Keeping a small business balance sheet can allow you to analyze your finances, or add information to the document when a new transaction occurs. Although most companies prepare their balance sheets at the end of a reporting period, changes can be made throughout the year.
How Do I Read a Balance Sheet?
A balance sheet is comprised of three different sections: assets, liabilities, and shareholder’s equity. Balance sheets start by listing your assets, followed by your liabilities. The last section will be your shareholders’ (owners’) equity.
This outline follows the balance sheet formula: Assets = Liabilities + Shareholders’ Equity.
What Are Assets?
An asset is any resource owned or controlled by a business or an economic entity that can easily be converted to cash. Assets can be further broken down into:
- Short-Term Assets: assets that you expect to sell, or convert into cash, within one year.
- Longterm Assets: assets that will not get converted into cash within one fiscal year.
On a small business balance sheet, some common short-term assets may include:
- Cash
- Marketable securities—traded investments that can be easily converted to cash
- Trade accounts receivable
- Employee accounts receivable
- Prepaid insurance
- Inventory
Some examples of long-term assets include:
- Fixed Assets: machinery, equipment, furniture, buildings, and land that you do not intend on selling within a year.
- Investments: only investments that are not expected to sell within a year are included in long-term assets.
- Intangible Assets: These are assets that are not physically present but still have value. They can include franchise rights, patents, copyrights, trademarks, and goodwill.
Small Business Liabilities
The next section on the balance sheet is the liabilities section. The future sacrifices of economic benefits that the entity is obliged to make to other entities as a result of past transactions or other past events. Just like assets, liabilities can be both short-term and long-term.
Some examples of short-term liabilities include:
- Trade Accounts Payable
- Accrued Expenses
- Taxes Payable
- Dividends Payable
- Customer Deposits
- Short-term Debt
Long-term liabilities on a small business balance sheet could include:
- Long-term Loans
- Capital Leases
- Pension Liabilities
- Deferred Compensation
- Deferred Revenue
- Deferred Income Taxes
Small Business Shareholder’s Equity
The final section of the balance sheet is shareholders’ equity. Shareholders’ equity is what you own after you subtract what you owe from your assets. To find your shareholders’ equity, you will need to know the difference between total assets and total liabilities.
Some common examples of shareholder’s equity that can be found on a small business balance sheet include:
- Retained Earnings: cumulative net earnings or profit after accounting for dividends.
- Additional Paid-in Captial: the difference between the par value of a stock and the price that investors actually pay for it.
- Par Value of Stock: stated value or face value of the stock.
Final Thoughts
Maintaining your finances with the help of a small business balance sheet will help keep your revenues organized. With a streamlined analytical process, setting and obtaining your goals will become more manageable. If you are looking to grow your business using a small business balance sheet may be the right choice for you.
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