Whether you run a translation agency or own a pest control company, you should be proactive about tracking balance sheets for your small business. A balance sheet is a financial document that outlines your company's assets and liabilities and any shareholders or stockholders' equity. Balance sheets must be updated regularly to reflect the current state of all three areas.
Along with other useful financial documents (the cash flow statement and the income statement), your balance sheet is an integral small business accounting tool. It's used to analyze and calculate your business's financial health and helps to provide a snapshot of how your company is doing in the big picture. With these important financial statements, you can answer basic questions, like what your company's net worth is.
Don't worry: You don't have to be an accounting whiz to create a balance sheet. Skynova's accounting software makes the process simple, straightforward, and stress-free. This article provides greater detail on what balance sheets are and why you need them. Below, we also give you a detailed, step-by-step guide on how to create your company's balance sheet.
What Is a Balance Sheet Used for?
Balance sheets are used to determine your business's worth at a given point. By determining your precise financial position in real time, you can make better-informed business decisions going forward. Again, the balance statement covers three specific points: assets, liabilities, and shareholders' equity. Looked at alongside the income and cash flow statements, a balance sheet can provide information about three key metrics of a company's financial performance.
You can determine a company's liquidity by comparing its assets to its liabilities. "Good" liquidity means having more liquid assets than liabilities, which would allow the company to cover short-term obligations (like paying employee salaries). The more liquid a company is, the better off it is financially. This means you have more of a monetary buffer if you need to cover operating and other costs.
If you look at the balance sheet and the income statement together, you can determine how efficiently your business is using its assets. By pinpointing inefficiencies, you can determine how to better use assets. One measure of efficiency is found by dividing revenue by average total assets. This reveals the asset turnover ratio, indicating how efficiently the business converts assets into revenue. In general, efficiency is all about determining how well your business generates revenue.
You can determine a company's leverage by looking at how it's financed. This lets you know how much financial risk the company is taking on. You can assess leverage on a balance sheet in various ways - for example, by comparing debt to total working capital or debt to equity. Leverage is essentially another word for debt. In business, it could mean that you've borrowed funds to buy inventory, for example. The more a company is leveraged, the greater its financial risk.
How Is the Balance Sheet Calculated?
The balance sheet is calculated based on the company's liabilities, assets, and shareholders' equity. Below, we walk you through each point, explaining what is included in each of these categories and their diverse subcategories.
Assets refer to tangible and intangible items that bring value to your business. Even if they are intangible, they can be converted to cash. Your balance sheet should list assets in terms of liquidity. Items that are the easiest to convert to cash are listed at the top, while those that are harder to convert to cash are listed at the bottom. There are also two categories of assets to account for on your balance sheet.
Current assets are those that could be converted to cash within a year. They might include cash accounts and cash equivalents (e.g., treasury bills), marketable securities (for which there is a liquid market), and investments (provided you can sell them within a year). Current assets may also include accounts receivable, inventory (both raw materials and finished goods), and prepaid expenses like the rent of your office space.
Long-term assets are those that can't be converted to cash within a year. They might include fixed assets like property, machinery, computers, and buildings. Long-term assets also include long-term investments and securities (which can't be sold within a year) and intangible assets like copyrights, patents, and franchise agreements.
Liabilities refer to money that your business owes to other companies, people, lenders, or creditors. These financial obligations detract value from your company. Liabilities could include bills due to suppliers, for example, money owed for salaries, utilities, or rent.
Like assets, liabilities are divided into current and long-term categories following the same criteria (one year) as assets. A current liability must be paid within the next 12 months. A long-term liability can be paid after 12 months. Here's what each category includes:
- Current liabilities: Wages payable, bank indebtedness, accounts payable, customer prepayments, interest due.
- Long-term liabilities: Long-term debt, deferred tax liability, or pension fund liabilities. For example, if you are required to pay into your employees' retirement accounts, this constitutes a pension liability.
Shareholders' equity is also referred to as net assets. It refers to any money that can be attributed to the business owners, also known as the shareholders. There is a simple accounting equation for calculating shareholder equity. All you have to do is subtract the total liabilities from the total assets. Here's the formula:
Stakeholders' Equity = Total Assets – Total Liabilities
So, if your total assets are $200,000, and your total liabilities are $100,000, the shareholders' equity is $100,000. If the company has one owner, the owner's equity is $100,000.
How Do You Create a Balance Sheet?
Skynova's accounting software allows you to easily and quickly generate balance sheets with minimal hassle. You have all the key points outlined for you and just need to input the relevant figures. The balance sheet template ensures your documents are formatted professionally. Here is an example of what the template looks like. Below, we provide you with a completed balance sheet example, giving you an idea of how you can implement the balance sheet software.
What Is a Balance Sheet Example?
The Skynova template is already set up according to the standard balance sheet format. All you have to do is plug in the necessary information. Let's walk through the creation of a sample balance sheet with Cara, who owns a bakery called "Cara's Cakes."
Using the Skynova template, Cara can see that she should start with her assets. Here's how she might fill out that section:
|Total Current Assets||$150,000|
|Total Fixed Assets||100,000|
|Total Intangible Assets||10,000|
|Total Other Assets||10,000|
Next, the Skynova template takes Cara through her liabilities and equity. Again, all she has to do is input the information. For example:
|LIABILITIES AND EQUITY|
|Total Current Liabilities||$30,000--|
|Total Long Term Liabilities||10,000--|
|Total Liabilities and Equity||100,000--|
The template even tallies up the total for Cara, so she doesn't have to stress with the extra math.
Let Skynova Help You Create Your Small Business Financial Statements
Skynova's accounting system makes it easy to organize, track, and analyze the financial documentation you'll need to create comprehensive balance sheets. Using a single platform to store all your important paperwork helps streamline your business operations, enhancing efficiency. This means you have to spend less time on administrative burdens and can free up your time for your core business competencies, focusing your energy on doing what you really love.