Business is all about balance. If there鈥檚 a mismatch between assets and liabilities or spending and revenue, you鈥檝e got a problem 鈥 and one that gets worse the longer it lasts.
Balance sheets help you track and manage your company鈥檚 finances. As a freelance writer and small business owner, I use a basic to track financial data.
Since it鈥檚 just me, my computer, and a cup of coffee here in the office, however, my balance sheet is pretty straightforward. If you run a small business with more than one employee or sell more than one service or product, you鈥檒l benefit from a more in-depth balance sheet.
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Balance sheets are all about 鈥 you guessed it 鈥 balance.
On the left-hand side of the balance sheet are your assets. These assets can include cash on hand, inventory on hand, and any money owed to your business by customers, also called accounts receivable (AR).
On the right-hand side of the balance sheet are your liabilities. They include debts, interest payable on these debts, wages payable to employees, and accounts payable (AP), which are processed invoices you haven鈥檛 yet paid.
Line items on each side of your balance sheet are listed in order of liquidity, with the more liquid items (e.g., cash and inventory) listed before accounts that are more illiquid (e.g., devices, property, and equipment).
Here鈥檚 an example of what that looks like:
The most important thing about your balance sheet? That it balances.
Here鈥檚 a quick example. My company takes out a $10,000 loan to buy new equipment. I record this $10,000 as a debt liability and also record it as an inventory asset. As a result, my sheet is balanced.
While there鈥檚 no 鈥渞ight鈥 way to build a balance sheet, many companies use what鈥檚 known as the common size balance sheet. This sheet format shows numerical values and percentages for each listed item, making it easier to spot discrepancies and create comparisons.
It鈥檚 also worth noting that balance sheets are snapshots of specific periods. For example, a monthly balance sheet includes your liabilities and assets for the past month. A yearly sheet covers everything for the last year.
As a result, balance sheets aren鈥檛 predictive on their own. To get a sense of larger trends and potential market shifts, you need to compare multiple sheets.
A balance sheet has three basic components: assets, liabilities, and shareholders鈥 equity.
defines an asset as 鈥渁nything of value that can be converted into cash.鈥 In other words, an asset provides economic value to businesses and organizations. Assets include both current and fixed assets.
Liabilities are the opposite of assets. They are anything that will incur an expense or cost in the future. For example, a debt owed is a liability. Both are included in the liabilities section of the balance sheet.
Shareholders' equity, also known as , is the amount of money the owners have invested in the business. It includes:
The balance sheet equation shows what a company owns (assets), how much it owes (liabilities), and how much stake or shares owners have in the business (shareholder鈥檚 equity). You can calculate it using the following accounting formula:
Assets = Liabilities + Shareholders' Equity
As noted above, your balance sheet needs to balance. But what happens when your assets outpace your liability? If you鈥檙e selling goods at a profit and increasing your customer base, the value of your assets may be larger than your liabilities.
Balance is achieved by subtracting liabilities from assets and listing them as shareholders鈥 equity. For example, if my assets total $50,000 and my liabilities are $30,000, shareholders鈥 equity is $20,000.
If, however, my assets are $30,000 and my liabilities are $50,000, my shareholders鈥 equity becomes negative $30,000 to balance out the equation.
The first step is to choose the reporting date, or when you鈥檙e compiling the report, and a reporting period.
For example, if your reporting period is Q1 (January 1 - March 31), your reporting date may be April 1 of the same year. Reports are usually created on an ongoing basis, usually quarterly or monthly.
Organize your assets into two categories 鈥 current and fixed 鈥 and represent each asset as a line item within the appropriate category. Then, subtotal each category and add them together.
These will also be represented as individual line items within current and noncurrent categories. Then, you'll subtotal and total these the same way you did with your assets.
You'll then want to incorporate the share capital you receive from investors as well as retained earnings. You may need to consider if your situation requires you to consider any of the following factors:
On the balance sheet, assets equal liabilities plus shareholders' equity. If assets outpace liabilities, shareholders鈥 equity is positive. If liabilities outpace assets, shareholders鈥 equity is negative.
Below is an example of a balance sheet. As you can see, the sheet itself isn鈥檛 complicated. Each asset or liability type has its own line, along with a space for subtotals and totals.
While the numbers differ, balance sheet formats are fairly consistent. So why reinvent the wheel? When I started my business, I didn鈥檛 build a balance sheet from scratch 鈥 I used a free template. I鈥檝e collected a few you can use to get started.
You鈥檙e reading the 探花精选 blog, so it should be no surprise I鈥檝e put this at the top of my list.
It should also be no surprise that it鈥檚 a great template.
It鈥檚 free, and it can be used in both Excel and Google Sheets. It鈥檚 simple, straightforward, and clear, making it easy to quickly record your assets, equity, and liabilities for comparison.
What I like: It鈥檚 completely customizable. Add your business鈥檚 branding, fonts, colors, and other key elements to make this balance sheet your own.
Toggl鈥檚 sheet uses boxes rather than lines to separate your assets and liability and highlights key areas to improve readability. All in all, it鈥檚 a great starting point.
What I like: Toggl鈥檚 balance sheet template gives an overview of your balances in a single view. I also like that it has pre-set items for current assets, fixed assets, current liabilities, and long-term liabilities, meaning you don鈥檛 have to add them yourself.
The QuickBooks balance sheet is a bit more complicated, but that鈥檚 not necessarily a bad thing. More subsections provide a more granular look at how your assets and liabilities compare, and what this means for your business.
What I like: QuickBooks鈥 balance sheet templates allow for all of the customizations you need to make to tailor it to your own business. It also comes with 鈥淣otes on Preparation鈥 tips to help you work through the specific template, and hovering over specific column items brings up instructions to ensure you input the right data.
Let鈥檚 be honest: The other templates on my list offer a little more visual interest than the Corporate Finance offering. Where it stands out, however, is its year-over-year comparison, which helps you get a sense of where your business is headed.
What I like: This balance sheet template from Corporate Finance comes with preset items to fill out for your business and an example balance sheet that you can use as a reference when filling one out for your own business.
Not surprisingly, Microsoft makes a great Excel spreadsheet. This balance sheet is quick, easy to use, and fully customizable.
What I like: Microsoft鈥檚 balance sheet divides your sheet into three key tabs: summary, assets, and liabilities. This helps you keep calculations separate to eliminate confusion and to give you an overview of balances in the summary tab.
What I like: This balance sheet includes notes for preparation to guide you through the setup and calculation process. It also includes an additional category named 鈥淥ther Assets,鈥 where you can take into account your business鈥檚 intangible assets and deposits.
Now, it鈥檚 time to analyze your balance sheet.
A balance sheet helps you determine your business鈥 liquidity, leverage, and rates of return. When your current assets are greater than your liabilities, your business is likely in a good financial position and can cover short-term financial obligations.
Comparing multiple balance sheets helps you better understand short- and long-term trends. For example, if you compare a current balance sheet with one from six months ago and you discover a significant decrease in your company鈥檚 available cash, you may be experiencing financial problems.
Other metrics to look at include:
Balance sheets provide an overview of a business's financial standing.
Comparing multiple balance sheets can help identify trends in assets and liabilities that inform future decision-making. If your assets consistently outpace your liabilities, keep doing what you鈥檙e doing. If your liabilities are on the rise but assets can鈥檛 keep pace, focus on finding out why.
Bottom line? Balance sheets aren鈥檛 the most exciting part of owning a business 鈥 but as I鈥檝e learned after a decade of being in business for myself, they鈥檙e an important part of long-term success.
Editor's note: This post was originally published in January 2019 and has been updated for comprehensiveness.