When asked how your small business is doing, the best way to show success is with a balance sheet. Norm Brodsky of Inc. sums it up well, writing, “Think of a balance sheet as a thermometer that provides a reading on the health of a business at the moment you take its temperature.”
Also called a statement of financial position, a balance sheet is usually one of several important items you might be asked to produce when applying for a small business loan.
This is an important document to use for tracking your small businesses spending and earnings and should be kept up to date every quarter to avoid problems down the road.
Some business owners that work with SmartBiz to secure an SBA loan have discovered that a current balance sheet is so helpful that they update it each month. Others struggle to put together a document that works for them. If you’re working with SmartBiz to obtain an SBA loan, a Relationship Manager can guide you if you do not have a balance sheet ready to go.
Here is basic information you need to know so you can create and maintain a balance sheet that is the right fit for your enterprise.
According to the SBA, the “bottom line” of a balance sheet must always include:
(assets = liabilities + net worth)
Cash is considered the most liquid of all assets. Long-term assets, such as equipment or real estate, are less likely to be quickly converted into a current asset, such as cash. Current assets are any assets that can be easily converted into cash within a calendar year. Examples of current assets are checking or money market accounts, accounts receivable and notes receivable that are due within that year. Total assets represent the total dollar value of both short-term and long-term assets.
Liabilities include operational costs, debt and material expenses. In general, the lower your liabilities, the greater the value of your business. Current Liabilities may include accounts payable, credit card bills that are due, lines of credit and taxes owed. Fixed Liabilities may include long-term mortgages, car loans and property or building mortgage expenses.
According to the Motley Fool website, the net worth of a business is also known as its book value, or as its owners’ (stockholders’) equity. This figure can be computed relatively easily using your company’s liabilities and assets with the above formula – subtracting the total liabilities from the total assets to get the net worth of the business.
Free Help is Available
SCORE, a free mentoring program for entrepreneurs, has an easy-to-understand balance sheet template here. You can make an appointment with your local office for assistance from a seasoned professional.
Additionally, Small Business Development Centers provide assistance to small businesses and aspiring entrepreneurs. Find your local SBDC here.
You might find this infographic from QuickBooks helpful as you put your balance sheet together: http://quickbooks.intuit.com/r/3-financial-statements-for-financial-reporting/ – BalanceSheet
The Bottom Line
As Brodsky warns in an Inc. bylined article, “It’s your responsibility as an owner to know and to understand not only the income statement but also the balance sheet of your business. You ignore them at your peril.”