This installment of the Factor Finders Startup Series is going to be dedicated to one of the most important documents that small business owners must learn to fill out—the balance sheet.
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 15th, 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 transactions cost 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 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 equivalents (like treasury bills)
- Marketable securities
- Accounts receivable
- Prepaid expenses
Long-term assets, on the other hand, are comprised of:
- Long-term investments
- Fixed assets
- Intangible assets
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
- 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.
Ready to make your own balance sheet? Thanks to free templates by companies like Google and Microsoft, it is actually a very simple endeavor. Follow this three-step process:
Find a Simple Balance Sheet Template
There are many free small business balance sheet templates out there on the internet. Find the one that works best for you. Here are three examples of strong balance sheets to use:
- Google Docs— Google offers a free balance sheet template for small businesses that is simple, cloud-based and easily accessible from anywhere. All you need in order to work on your balance sheet is a Google account and internet connection.
- QuickBooks— the Intuit subsidiary has a downloadable spreadsheet that you can use free of charge, providing that you already have Microsoft Office installed on your computer.
- Microsoft Excel— Microsoft offers its own rendition of a balance sheet template for Excel and Excel Online. If you’ve already got Microsoft Office, check it out.
Enter your Data
Fill in the template. This step requires that you maintain great bookkeeping methods throughout the course of every business cycle.
Interpret the Results
Yup, just pick a template, plug in the numbers and analyze—no arithmetic necessary. The templates will do that for you.
It is quick and easy to make a business balance sheet. Once you’ve got your results, you can use your balance sheet for financial analysis or for applying for loans, credit, etc. For more tips on how to be a successful startup company owner, check out the other articles in the Startup Series. For more tips on how to finance your startup (even if you don’t have the best credit score), give Factor Finders a call and learn about invoice factoring solutions.