A Balance Sheet for Small Business

What is a Balance Sheet?

A balance sheet is one of the foundational financial statements of any business. Sometimes called the “statement of financial position,” balance sheets summarize a company’s assets and liabilities at a specific time.

Balance sheets give a small business owner a snapshot of his/her company’s financial standing at any one moment during the business cycle. Take note that a balance sheet does not report on the fluctuating financial position of a company during some range of time—like a month, business quarter or year—but rather a specific instant (say, December 15^th, 2016). Balance sheets reflect the culmination of all of the transactions that have been completed up until the day that it was compiled—again, think “snapshot.”

Balance Sheet vs. Income Statement

You may be saying, “hold up—this sounds familiar. Didn’t I just read about something similar to this in the Startup Series article about profit and loss statements?”

You sort of did. The two are interrelated—yet distinct—documents that help business owners and creditors get an accurate assessment of a company’s financial status. The two forms differ in their respective time frames and specific functions.

An income statement does not offer a snapshot of a business’s financial standing—rather, it tracks the fluctuations of incomes and losses over a period of time. The income statement is useful in that it lets startup owners take a look at what transaction costs and benefit them so that they can alter their strategies accordingly. Balance sheets do not perform this function—rather than tracking financial status over a period of time, it shows startup owners how their finances are on that day. Balance sheets are not concerned about specific costs or incomes. Instead, it focuses on overall financial standing.

Balance sheets are crucial for small business startups as they seek financing. Creditors and lenders will often ask for balance sheets before doing business with startups. It is thereby very important to understand how to make one.

Components of a Balance Sheet

Let’s get a bit more technical. What is a balance sheet made up of?

There are three different financial categories that make up a balance sheet—assets, liabilities and owner’s (shareholder’s) equity. As a small business startup, the latter category won’t apply to you. So let’s break down the two categories that you need to understand: assets and liabilities.

Assets

Assets are resources that a corporation possesses that holds some sort of economic value. Small business balance sheets list a company’s assets from the top down according to their liquidity (i.e. the ease with which they can be exchanged for money).

There are two types of assets, current and long-term. Current assets can be converted into cash in one year or less, while long-term assets would require more time to do so. According to Investopedia, the general order of accounts within the current assets category goes as follows:

• Cash
• Cash equivalents (like treasury bills)
• Marketable securities
• Accounts receivable
• Inventory
• Prepaid expenses

Long-term assets, on the other hand, are comprised of:

• Long-term investments
• Fixed assets
• Intangible assets

Liabilities

Liabilities are the sum of money that a company owes to outside actors. Liabilities, too, are subdivided into current and long-term sections. Per Investopedia, current liabilities include:

• Immediate segments of long-term debt
• Bank indebtedness
• Interest payable
• Wages payable
• Rent
• Tax
• Utilities
• Customer prepayments

Long-term liabilities are made up of:

• All forms of long-term debt
• Pension fund liabilities of employees
• Deferred taxes

The balance sheet, at the end, will reflect the sum of your company’s assets and liabilities. To gain some context about the information presented in this section, we recommend that you take a look at some sample balance sheets on the internet. Examining how other small businesses do their accounting will help you learn how to read a balance statement comfortably and will ultimately prepare you to make your own.

Additional Resources

How to Create a Cash Flow Statement

How to Make a Profit and Loss Statement