Wed May 26, 2021 | | Accounting, Small Business

Understanding Your Small Business Balance Sheet


small business balance sheet

As any small business owner, you know that you must keep track of your financial data: what your company earns, what your company owes, and your company is worth  (owner’s equity or stockholders’ equity). A small business balance sheet helps you organize and document this information so that you can assess not just your business’s assets, liabilities, and equity but, most importantly, the overall financial health of your company.

Unfortunately, understanding balance sheets is a skill that some entrepreneurs don’t give proper attention to, either because they lack an understanding of what the numbers mean, or they just don’t have the time. The US Small Business Administration (SBA) notes that about 404,000 startups launched in 2014 alone. However, about 392,000 firms closed that same year. Among small businesses that do survive, only about half of them stay in business for at least five years, the SBA says.

If you opened your business with more creative inspiration than financial know-how, we can help. CFO Strategies has a team of financial and accounting professionals who can review your balance sheet if you currently have one, or build financial reports, including but not limited to balance sheets, income statements, cash flow forecasts, and earnings forecasts.  In addition, CFO Strategies can draw an accurate picture of your company’s financial health and offer advice to help your business perform better based on your company’s particular goals and objectives.

CFO Strategies provides virtual accounting services and bookkeeping services to small business owners in a variety of industries, including architecture, construction, engineering, real estate, manufacturing, and nonprofit. CFO Strategies also acts as a company’s chief financial officer or financial controller. To discuss the financial support you need and build a customizable approach to your financial needs, please contact us.

What Is a Balance Sheet for a Small Business?

A balance sheet is a snapshot of your company’s financial state. A balance sheet will show your company’s assets, liabilities, and equity. 

Although you can update a balance sheet at any time, many businesses prepare them after a set reporting period to assess their financial health before taking on additional debt or to set earning goals for their existing business. A successful business uses a balance sheet in conjunction with its income statement and cash flow statement, gaining the insights needed to make informed financial decisions.

How to Read a Balance Sheet

To fully understand your company’s financial performance, let’s look at some key terms that you’ll find on a sample balance sheet:

Assets

Your company’s assets are items of value that your business owns. Some examples of assets you may find on your balance sheet include, but are not limited to:

  •       land
  •       inventory
  •       equipment
  •       vehicles
  •       real estate
  •       prepaid insurance

Other assets include accounts receivable, which is money that customers owe for your goods or services that you have not yet received. 

Many businesses may also have intangible assets, which include intellectual property, copyrights, trademarks, and goodwill (brand recognition).

Liabilities

Liabilities obligations that a business owes, whether the money to a vendor or a bank, or even legal obligations.

The most common liability on a balance sheet is accounts payable. Other liabilities include, but are not limited to:

  •       short-term and long-term debt
  •       unused employee vacation pay
  •       income taxes, such as state income tax payable by a certain deadline each year
  •       bonds payable
  •       deferred compensation 

Current liabilities refer to any short-term obligations, or those that are due within a normal operating cycle, such as one year. Long-term liabilities such as bond interest payments are obligations not due for more than a year.

Equity

If you own a home, you’re familiar with the concept of equity. The mortgage payments that you make along with how much your property appreciates over time creates equity or value in your initial investment—in this case, your home.

In the business world, equity is the money that would be returned to your shareholders if the company paid all of its debts and liquidated its assets. During a business acquisition, equity is the value of the company’s sale minus any liabilities not transferred as part of the sale.

Equity also includes contributed capital as well as retained earnings, or the net income since the owner’s investment in or inception of the business.

A publicly held company has shareholders’ equity or stockholders’ equity; privately held companies have owners’ equity. Even if you have no shareholders, you still have owner’s equity. Owner’s equity is whatever is left after subtracting your liabilities from your assets. In other words:

Equity = Assets – Liabilities.

Trust CFO Strategies with Your Balance Sheets

At CFO Strategies, we understand that many business owners thrive on the creativity and flexibility of being an entrepreneur and not on calculating dollars and cents. Developing another financial statement feels daunting for some people, who are happy to pass the buck on organizing a balance sheet to someone else. But does that leave your livelihood in good hands?

If you think that having a balance sheet is a sound business decision but aren’t sure where to begin, trust our experienced financial professionals to act as your bookkeeper, accountant, controller, chief financial officer, or even just your consultant or adviser as a sounding board. We are here to help and would be happy to provide a free business review to help you to evaluate your current business plan and help strengthen the financial oversight of your business.

Let us show you how we can provide the support you need to keep your finances on track and achieve the financial goals for your business. Please contact us using our online form or call us at (732) 236-4454 to arrange for a consultation.