As a small business owner, you must be aware of all aspects of your company. When you look at the list of “need to know” items, it can quickly feel overwhelming. This is when customers of Park City Bookkeepers usually reach out to us for help.
No matter what your situation, one of the best ways to stay up-to-date is to create and review a balance sheet on at least a quarterly and annual basis.
By using Financial Intelligence on Demand, it takes analyzing the Balance Sheet one step further, giving our customers a competitive advantage. We give access to our customers through our website to instantly run game-changing ratios from the balance sheet and P&L while also comparing to other businesses in their industry and geographic areas in real-time.
So, back to basics…what is the Balance Sheet Report?
It’s a summary of your company’s finances as of a specific date and has three sections:
- Assets: What the business owns
- Liabilities: What the business owes
- Equity: Owners’ or shareholders’ equity retained earnings, contributions, and distributions.
These three sections must “balance” based on the equation:
Assets = Liabilities + Equity
Assets
The total assets are the total cost value of everything your business owns. Another way of saying this is, the amount of asset items based on the purchase price. The three categories of total assets are current (or liquid) assets, fixed assets, and other assets.
Current assets are cash and other items that likely will become cash during the current business year and include:
- Cash: Money that’s immediately available.
- Accounts Receivable: Money your customers owe you. You decrease this amount by a Reserve for Bad Debts to account for money you expect to write off when customers don’t pay.
- Prepaid Expenses: Expenses paid in advance, such as a full year’s insurance premium.
- Inventory: Total cost of sellable products you have in stock.
- Securities: Investments, including money market funds.
- Notes Receivable: Money owed to your business but which isn’t on a regular payment schedule. Sometimes loans from owners fall into this category.
Fixed assets include items that you won’t sell. Think equipment, buildings, and land. These assets usually decrease in value over time and accumulate depreciation.
Other assets are anything you own that isn’t current or fixed, including intangible assets, such as goodwill, patents, copyrights, and trademarks.
Liabilities
Total liabilities are the total value of your business debts:
- Current liabilities are amounts you expect to pay within a year, such as accounts payable, sales and payroll taxes, and payments on short-term business loans, such as a line of credit.
- Long-term liabilities are amounts you are due to pay over a timeframe longer than a year. These liabilities include leases or mortgages, long-term loans and future employee benefits.
Equity
Entries in the equity section are:
- Par value of capital stock
- Additional paid-in capital (payment, from investors, that exceeds the par value of the stock)
- Retained earnings
Equity must equal assets minus liabilities.
What Can a Balance Sheet Tell You?
You can compare balance sheets to identify and analyze trends:
- Does your business have the money to continue to fund its own growth or expansion?
- Can the business easily manage the normal ups and downs of revenues and expenses? Or do you need to increase cash reserves? Have you been slowing down payables to avoid a cash shortage?
- Is the receivables cycle becoming longer? Do you need more aggressive collection of receivables? Do you believe some debt is uncollectible?
- Is inventory growing faster than your revenue? This trend may indicate inefficient inventory management.
The balance sheet, along with the income statement and cash flow statement, are essential financial tools for a small business. Take the hassle out of producing your financial statements by working with a qualified bookkeeper and accountant. We’d be happy to help you. Contact us here.
For more information in video form, Khan Academy has a nice, simple video that explains the Balance Sheet with pictures and a simplified explanation. Don’t let the cartoon appearance turn you off. Khan Academy is partially funded by Bill Gates and has amazing information. Check it out below.