When you’re applying for small business financing, you’ll probably find that a balance sheet is required. Learn more about this document so you know what to expect.
What is a Balance Sheet?
A balance sheet is a document that provides a snapshot of a company’s financial health at a specific point in time. You can use them regularly to see your business’s net worth and to provide lenders with an idea of how much you own, debts owed, and how much you invest in your operations. Also, several important calculations can be derived from the data on a balance sheet, including the debt-to-equity ratio. To learn about the important debt-to-equity ratio, review this post on the SmartBiz Small Business Blog here.
Keep in mind, though, that a balance sheet taken on its own won’t reveal any trends in the business’s finances. To get a sense of a business’s finances over time, lenders will often require an income statement as well.
Wondering where the key differences lie? Learn all about them on the SmartBiz Small Business Blog.
A balance sheet is based on this equation:
Assets = Liabilities + Owner’s Equity
To translate this formula into a more intuitive statement, a business owner has to expense all the company’s assets by either borrowing capital (taking on liabilities) or investing personal funds (issuing owner’s equity).
Main Elements on a Balance Sheet
Here’s how a balance sheet breaks down.
Current assets can be turned into cash within a year of the date. On a balance sheet, they’re ordered in terms of relative liquidity, which is a measure of how quickly an item can become cash. Some common assets include:
- Cash: funds in your checking or savings accounts
Marketable securities: stocks, bonds, and other short-term investments
- Accounts receivable: money your clients or customers owe
- Inventory: products ready to be sold
Prepaid expenses: insurance, rent, contracts, and other payments made in advance
Next come long-term or non-current assets. These represent items like investments, commercial real estate, large equipment, and intellectual property that will be useful to the company for more than a year.
In contrast to assets, liabilities represent the amounts that a company owes. Current liabilities, those due within a year of the balance sheet date, can include:
- Bills: credit cards, rent, utilities, etc.
- Accounts payable: money your business owes to suppliers, vendors, or partners
- Wages payable: employee compensation including insurance benefits
- Taxes owed: federal and state taxes owed for that year
- Loan payments: any upcoming interest payments on outstanding debt
Long-term or fixed liabilities might be long-term debt, mortgages, bonds, and pension fund obligations.
The final category on a balance sheet is owner’s equity. In this section, you’ll find the capital that the owner can contribute and the retained earnings. This term describes the profit a company earned over a certain period of time and is used either to reinvest in the business or to pay off debt. Other items might include common stock.
A balance sheet will typically have each of the three main sections broken down line by line and calculated as a sum of the individual amounts. Ultimately, the total assets should equal the sum of the total liabilities and the total owner’s equity. This is a good test for whether the document was put together correctly.
Once your balance sheet is completed and double-checked, you can use it to get an understanding of your business’s financial health at that given moment.
A balance sheet is one of the most commonly requested documents in small business lending. This financial statement, along with others, will give a lenders an inside look at your unique business. If you’re considering an SBA loan, the “gold standard” in the industry, find the SmartBiz requirements here.
See how your company stacks up to SmartBiz partner banks key metrics by getting started with SmartBiz Advisor today. You’ll find personalized insights and recommendations to help you build your lending profile and increase the likelihood of getting to a “yes.”
* The information provided through SmartBiz Advisor, including the Loan Ready Score, is for educational purposes and is not the same as scores used by lenders for credit decisions. SmartBiz Advisor is not a financial or legal advisor as defined under federal or state law. Use of this information is not a replacement for personal, professional advice or assistance regarding your finances or credit history.