No matter what stage your business is in, there are certain key financial documents you’ll need to create and maintain to keep your business growing. One of the most important documents is your balance sheet.
If you haven’t created a business balance sheet, or if you need to update yours, here’s everything you need to know.
What’s a business balance sheet?
Your balance sheet is a snapshot of your business financials at one date in time. This is different from your income statement, which shows your finances over a range of dates. Managing your business balance sheet allows you to track how your business is growing and if you’re on track to meet your goals.
Having an updated balance sheet lets you compare two different points in time to see changes in your retained earnings, accounts receivable, accounts payable, inventory, cash, and equity.
Analyzing how your balance sheet changes over time will reveal important financial information and give you the insight you need to sustain and grow your business.
Why are balance sheets important?
Your balance sheet shows you everything you own, owe, and have invested in your business. It’s an easy way to see if your business is profitable and has enough liquidity to fulfill your obligations.
A lender or investor will want to review your balance sheet when they’re reviewing your business financials. Being able to quickly pull this information together, or having it ready ahead of time, will show that you have a good handle on your finances. The figures in this document will show lenders and investors if you’ll be able to repay your debt and the overall financial health of your business.
You’ll also need information from your balance sheet to calculate your liquidity, solvency, and other important financial ratios.
What should I include on my business balance sheet?
There are three important categories to include on your balance sheet, which make up the balance sheet equation:
Assets = liabilities + net worth (owner’s equity)
Your assets include all your cash and property that are owned by or due to your business. Your short-term assets are items that can quickly be converted into cash, like the money in your business accounts and your best-selling inventory. You also have long-term assets like commercial real estate and equipment that take longer to turn into case.
The assets on your balance sheet are divided into two categories: current assets (short-term) and noncurrent assets (long-term). You might also list your non-current assets as fixed assets or intangible assets. Fixed assets, like your equipment or building, will depreciate over time. Intangible assets include any patents, trademarks, copyrights, or goodwill for your business. While they’re not a physical asset, they contribute to your business’s revenue and offerings.
Your liabilities are what your business owes to others. Any business loans or other debt would be listed in your liabilities as well as money owed to vendors and suppliers.
Liabilities are also divided into two categories: current liabilities (near-term) and noncurrent liabilities (long-term). Current liabilities are due within 12 months. This is where you’ll list your accounts payable, sales taxes payable, employee wages, interest payable, unearned revenues, and accrued expenses.
Noncurrent liabilities are due sometime after your current accounting year. You’ll include your long-term lease obligations, long-term bank loans, and deferred revenues in this section of your balance sheet.
Your net worth or owner’s equity is your own investment in the business. This includes money you’ve invested and income you’ve reinvested in the business from your profits. Here, you’ll list your stock and retained earnings. Your equity is an important figure that shows your business’s financial health. You might also see equity referred to as your net assets, because it shows the value of your assets after subtracting your liabilities.
How often should I update my balance sheet?
Most businesses update their balance sheet each month, quarter, or year. Of course, any time you need a balance sheet, you can have one prepared to show your financial position at that moment. When your business is smaller or just getting started, you might create the balance sheet yourself or use a bookkeeper. As your business grows, you could create it internally and have it reviewed by an accountant.
What should I avoid when creating a balance sheet?
Like any financial document, one of the biggest mistakes you can make is including inaccurate or incomplete information. That’s why many businesses invest in bookkeeping software like QuickBooks or Xero, which can easily collect your financial information and work it into common financial documents.
While these systems make it easier to maintain your books, they can still make mistakes if they’re not set up properly. Take the time to work with your bookkeeper or accountant to set up your bookkeeping software to ensure it’s organizing and tracking your financial data accurately.
How is my balance sheet different than my other financial documents?
Your balance sheet may contain some of the same categories as other financial documents, but it focuses on one period in time to give you a snapshot of your current finances. In addition to your balance sheet, you should also create and maintain other key financial documents like an income statement, cash flow statement, tax returns, and accounts receivable and payable.
Together, these documents will guide you toward new opportunities and help you find issues before they become major problems. You’ll have the right information to develop strategies based on real data and be better prepared to apply for a business loan when you need one.
When you’re ready for financing, talk to Pursuit
As your business grows and finds new opportunities, you might need a business loan to support your goals. With your updated balance sheet and other financial documents at the ready, you can apply for a business loan through Pursuit to keep your business reaching higher. We offer more than 15 business loan programs for working capital, equipment, commercial real estate, and so much more. Talk to us today to learn more about how we can work together.
