balance sheet for a business plan

How to write a balance sheet for a business plan

Table of Contents

What is a balance sheet?

Elements of a balance sheet, liabilities, how to write a balance sheet, manage your business finances with countingup.

A balance sheet is one of three major financial statements that should be in a business plan – the other two being an income statement and cash flow statement .  

Writing a balance sheet is an essential skill for any business owner. And while business accounting can seem a little daunting at first, it’s actually fairly simple. 

To help you write the perfect balance sheet for your business plan, this guide covers everything you need to know, including:

• What are assets?
• What are liabilities?
• What is equity?

A balance sheet is a financial statement that shows a business’ “book value”, or the value of a company after all of its debts are paid. 

For those inside the business, it provides valuable financial insights, allowing the owners to assess their current financial situation and plan for the future. 

For external investors, a balance sheet lets them know whether it’s a worthwhile investment.  

Putting a balance sheet together isn’t all that difficult. You just need to know the value of three things:

• Owner’s equity

Once you know these three figures, there’s just a little bit of maths – nothing too scary though.

Assets are items or resources that have financial value. They might be physical items, machinery and vehicles, or they could be intangible items, like copyrights or brand identity .

Assets are separated into two groups based on how quickly you can turn them into cash. There are current assets and fixed assets. 

Current assets are things that are fairly simple to value and sell, such as:

• Stock and inventory
• Cash in the bank
• Money owed to you (through unpaid invoices )
• Customer deposits
• Office furniture, equipment or supplies
• Phones or laptops
• Even relatively trivial items like a coffee machine or pool table

Fixed assets are valuable items that take much longer to sell, such as:

• Property or buildings
• Specialised equipment for your business operations
• Investments
• Vehicles 

On your balance sheet, the asset column is the simplest. All you need to do is list each item your business owns, along with their individual values, in a separate column. Then, add up the values to get a total at the bottom. 

Liabilities are the funds that you owe to other people, banks, or businesses. They can be:

• A business loan (the total, not the monthly payment amount)
• A mortgage or rent payment on a property
• Supplier contracts you owe
• Your accounts payable total
• Other financial obligations, such as paying wages or freelancers for support
• Taxes you’ll owe to HMRC

List these in the same way you did with your assets – on a spreadsheet with their values in a separate column. 

When you know the value of your assets and liabilities, working your equity is simple – it’s just the total value of your assets, minus the total value of your liabilities. 

Record the owner’s equity in the same column as your liabilities. When you add them all up, it should be the same value as your assets. 

After you’ve totalled up your assets, liabilities, and owner’s equity, all that’s left to do is fill in your balance sheet. 

Using a spreadsheet, record your assets on the left and your liabilities and owner’s equity on the right. 

For example, here’s what a balance sheet might look like for a painter and decorator:

If you’ve recorded everything correctly, both sides should have the same total. Whenever you make a change, the balance sheet will change, but it should still be balanced. 

For example, let’s say our painter and decorator sold their equipment. In that case, they’d lose an asset worth £200, but they’d also gain £200 in cash, so the asset total would stay the same. 

Alternatively, let’s say they lost the equipment altogether and got no money for it. In that case, they’d lose £200, leaving their asset total at £5,600. Then, they’d have to adjust the other side, so it remains balanced, like this:

If your two totals are not balanced, it’s most likely for one of these reasons:

• Incomplete or missing information
• Incorrect data entry
• A mistake in exchange rates
• And inventory miscount

Basically, if things don’t look right, try not to panic. It’s normally a simple mistake, so go over the figures again and you’ll find the culprit. 

The trickiest part of writing a balance sheet for a business plan is accurately recording financial information. 

With the Countingup business current account, you’ll have access to a digital record of all your transactions in one simple app, giving you all the financial information you’ll need for a business plan.

Start your three-month free trial today. 

Find out more here .

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What Is a Balance Sheet? Definition, Formulas, and Example

Trevor Betenson

10 min. read

Updated May 2, 2024

Business financial statements consist of three main components: the income statement , statement of cash flows , and balance sheet. The balance sheet is often the most misunderstood of these components—but also extremely beneficial if you understand how to use it.

Check out our free downloadable Balance Sheet Template for more, and keep reading to learn the different elements of a balance sheet, and why they matter.

• What is a balance sheet?

The balance sheet provides a snapshot of the overall financial condition of your company at a specific point in time. It lists all of the company’s assets, liabilities, and owner’s equity in one simple document.

A balance sheet always has to balance—hence the name. Assets are on one side of the equation, and liabilities plus owner’s equity are on the other side.

Assets = Liabilities + Equity

• What is the purpose of the balance sheet?

Put simply, a balance sheet shows what a company owns (assets), what it owes (liabilities), and how much owners and shareholders have invested (equity).

Including a balance sheet in your business plan is an essential part of your financial forecast , alongside the income statement and cash flow statement.

These statements give anyone looking over the numbers a solid idea of the overall state of the business financially. In the case of the balance sheet in particular, what it’s telling you is whether or not you’re in debt, and how much your assets are worth. This information is critical to managing your business and the creation of a business plan.

The balance sheet includes spending and income that isn’t in the income statement (also called a profit and loss statement). For example, the money you spend to repay a loan or buy new assets doesn’t show up in the income statement. And the money you take in as a new loan or a new investment doesn’t show up in the income statement either. The money you are waiting to receive from customers’ outstanding invoices shows up in the balance sheet, not the income statement.

Among other things, your balance sheet can be used to determine your company’s net worth. By subtracting liabilities from assets, you can determine your company’s net worth at any given point in time.

• Key components of the balance sheet

Typically, a balance sheet is divided into three main parts: Assets, liabilities, and owner’s equity.

Assets on a balance sheet or typically organized from top to bottom based on how easily the asset can be converted into cash. This is called “liquidity.” The most “liquid” assets are at the top of the list and the least liquid are at the bottom of the list.

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In the context of a balance sheet, cash means the money you currently have on hand. In business planning, the term “cash” represents the bank or checking account balance for the business, also sometimes referred to as “cash and cash equivalents” or “CCE.”

A cash equivalent is an asset that is liquid and can be converted to cash immediately, like a money market account or a treasury bill.

Accounts receivable

Accounts receivable is money people are supposed to pay you, but that you have not actually received yet (hence the “receivables”).

Usually, this money is sales on credit, often from business-to-business (or “B2B”) sales, where your business has invoiced a customer but has not received payment yet.

Inventory includes the value of all of the finished goods and ready materials that your business has on hand but hasn’t sold yet.

Current assets

Current assets are those that can be converted to cash within one year or less. Cash, accounts receivable, and inventory are all current assets, and these amounts accumulated are sometimes referenced on a balance sheet as “total current assets.”

Long-term assets

Long-term assets are also referred to as “fixed assets” and include things that will have a long-standing value, such as land or equipment. Long-term assets typically cannot be converted to cash quickly.

Accumulated depreciation

Accumulated depreciation reduces the value of assets over time. For example, if a business purchases a car, the car will lose value as time goes on.

Total long-term assets

Total long-term assets is used to describe long-term assets plus depreciation on a balance sheet.

Liabilities

Like assets, liabilities are ordered by how quickly a business needs to pay them off. Current liabilities are typically due within one year. Long-term liabilities are due at any point after one year.

Accounts payable

Accounts payable is the money that your business owes to other vendors, the other side of the coin to “accounts receivable.” Your accounts payable number is the regular bills that your business is expected to pay.

Pay attention to whether this number is exceedingly high, especially if your business doesn’t have enough to cover it.

Sales taxes payable

This only applies to businesses that don’t pay sales tax right away, for example, a business that pays its sales tax each quarter. That might not be your business, so if it doesn’t apply, skip it.

Short-term debt

This is debt that you have to pay back within a year—usually any short-term loan. This can also be referred to on a balance sheet as a line item called current liabilities or short-term loans. Your related interest expenses don’t go here or anywhere on the balance sheet; those should be included in the income statement.

Total current liabilities

The above numbers added together are considered the current liabilities of a business, meaning that the business is responsible for paying them within one year.

Long-term debt

These are the financial obligations that it takes more than a year to pay back. This is often a hefty number, and it doesn’t include interest. For example, this number reflects long-term loans on things like buildings or expensive pieces of equipment. It should be decreasing over time as the business makes payments and lowers the principal amount of the loan.

Total liabilities

Everything listed above that you have to pay out or back is added together.

This is the sum of all shareholder money invested in the business and accumulated business profits. Owner’s equity includes common stock, retained earnings, and paid-in-capital.

Paid-in capital

Money is paid into the company as investments. This is not to be confused with the par value or market value of stocks. This is actual money paid into the company as equity investments by owners.

Retained earnings

Earnings (or losses) that have been reinvested into the company, that have not been paid out as dividends to the owners. When retained earnings are negative, the company has accumulated losses. This can also be referred to as “shareholder’s equity.”

This doesn’t apply to all legal structures for a business; if you are a pass-through tax entity , then all profits or losses will be passed on to owners, and your balance sheet should reflect that.

Net earnings

This is an important number—the higher it is, the more profitable your company is. This line item can also be called income or net profit. Earnings are the proverbial “bottom line”: sales less costs of sales and expenses.

Total owner’s equity

Equity means business ownership, also called capital. Equity can be calculated as the difference between assets and liabilities. This can also be referred to as “shareholder’s equity” or “stockholder’s equity.”

Total liabilities and equity

This is the final equation I mentioned at the beginning of this post, assets = liabilities + equity.

• How to use the balance sheet

Your balance sheet can provide a wealth of useful information to help improve financial management. For example, you can determine your company’s net worth by subtracting your balance sheet liabilities from your assets, as noted above.

Overall, the balance sheet gives you insights into the health of your business. It’s a snapshot of what you have (assets) and what you owe (liabilities). Keeping tabs on these numbers will help you understand your financial position and if you have enough cash to make further investments in your business.

Perhaps the most useful aspect of your balance sheet is its ability to alert you to upcoming cash shortages. After a highly profitable month or quarter, for example, business owners sometimes get lulled into a sense of financial complacency if they don’t consider the impact of upcoming expenses on their cash flow .

There are two easy-to-figure ratios that can be computed from the balance sheet to help determine whether your company will have sufficient cash flow to meet current financial obligations:

Current ratio

This measures liquidity to show whether your company has enough current (i.e., liquid) assets on hand to pay bills on-time and run operations effectively. It is expressed as the number of times current assets exceeds current liabilities.

The higher the current ratio, the better. A current ratio of 2:1 is generally considered acceptable for inventory-carrying businesses, although industry standards can vary widely. The acceptable current ratio for a retail business, for example, is different from that of a manufacturer.

Current ratio formula

Current Assets / Current Liabilities

Quick ratio

This ratio is similar to the current ratio but excludes inventory. A quick ratio of 1.5:1 is generally desirable for non-inventory-carrying businesses, but—just as with current ratios—desirable quick ratios differ from industry to industry.

Quick ratio formula

Current Assets – Inventory / Current Liabilities

Knowing your industry’s standards is an important part of evaluating your business’s balance sheet effectively.

• The limits of the balance sheet

Remember, the balance sheet alone doesn’t give you a complete view of your business finances. You’ll want to keep tabs on your profit & loss statement (income statement) and cash flow as well.

Your profit & loss statement will show you the sales you are making and your business expenses and calculates your profitability. This is crucial for understanding the core economics of your business and if you’re building a profitable business, or not.

Your cash flow forecast shows how cash is moving in and out of your business and can help you predict your future cash balances. Fast growth can reduce cash quickly, especially for businesses that carry inventory, so this is a crucial statement to pay attention to as well.

The three statements all work together to provide you with a complete picture of your business. The balance sheet also helps illustrate how cash and profits are very different things .

• Example of a balance sheet

Large businesses will have longer and more complex balance sheets for their businesses, sometimes having separate balance sheets for different segments or departments of their business. A small business balance sheet will be more straightforward and have fewer line items.

Here is a balance sheet from Apple, for example. You’ll see that it includes a complex stockholder’s equity section and several specifically itemized types of long-term assets and liabilities.

Apple’s balance sheet .

You’ll also notice that it says “Period Ending” at the top; this indicates that these numbers are reflective of the time up until the date listed at the top of the column. This terminology is used when you are reporting actual values, not creating a financial forecast for the future.

• Get familiar with your balance sheet

Most companies should update their balance once a month, or whenever lenders ask for an updated balance sheet. Today’s accounting software programs will create your balance sheet for you, but it’s up to you to enter accurate information into the program to generate useful data to work from.

The balance sheet can be an extremely useful financial tool for businesses that understand how to use it properly. If you’re not as familiar with your balance sheet as you’d like to be, now might be a good time to learn more about the workings of your balance sheet and how it can help improve financial management.

Create your balance sheet easily by downloading our Balance Sheet Template , and check out our full guide to write your financial plan.

Trevor is the CFO of Palo Alto Software, where he is responsible for leading the company’s accounting and finance efforts.

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Understanding a Balance Sheet (With Examples and Video)

Frances McInnis

Reviewed by

May 3, 2024

This article is Tax Professional approved

Balance sheets can help you see the big picture: the net worth of your small business, how much money you have, and where it’s kept. They’re also essential for getting investors, securing a loan , or selling your business.

So you definitely need to know your way around one. That’s where this guide comes in. We’ll walk you through balance sheets, one step at a time.

I am the text that will be copied.

What is a balance sheet?

The balance sheet is one of the three main financial statements , along with the income statement and cash flow statement .

While income statements and cash flow statements show your business’s activity over a period of time, a balance sheet gives a snapshot of your financials at a particular moment. It incorporates every journal entry since your company launched. Your balance sheet shows what your business owns (assets), what it owes (liabilities) , and what money is left over for the owners ( owner’s equity ).

Because it summarizes a business’s finances, the balance sheet is also sometimes called the statement of financial position. Companies usually prepare one at the end of a reporting period, such as a month, quarter, or year.

The purpose of a balance sheet

Because the balance sheet reflects every transaction since your company started, it reveals your business’s overall financial health. Investors, business owners, and accountants can use this information to give a book value to the business, but it can be used for so much more.

At a glance, you’ll know exactly how much money you’ve put in, or how much debt you’ve accumulated. Or you might compare current assets to current liabilities to make sure you’re able to meet upcoming payments.

The information in your company’s balance sheet can help you calculate key financial ratios, such as the debt-to-equity ratio, a metric which shows the ability of a business to pay for its debts with equity (should the need arise). Even more immediately applicable is the current ratio : current assets / current liabilities. This will tell you whether you have the ability to pay all your debts in the next 12 months.

You can also compare your latest balance sheet to previous ones to examine how your finances have changed over time. You’ll be able to see just how far you’ve come since day one.

Further reading: How to Read a Balance Sheet

A simple balance sheet template

You can download a simple balance sheet template here . You record the account name on the left side of the balance sheet and the cash value on the right.

What goes on a balance sheet

At a high level, a balance sheet works the same way across all business types. They are organized into three categories: assets, liabilities, and owner’s equity.

Let’s start with assets—the things your business owns that have a dollar value.

List your assets in order of liquidity , or how easily they can be turned into cash, sold or consumed. Bank accounts and other cash accounts should come first followed by fixed assets or tangible assets like buildings or equipment with a useful life longer than a year. Even intangible assets like intellectual properties, trademarks, and copyrights should be included. Anything you expect to convert into cash within a year are called current assets.

Current assets include:

• Money in a checking account
• Money in transit (money being transferred from another account)
• Accounts receivable (money owed to you by customers)
• Short-term investments
• Prepaid expenses
• Cash equivalents (currency, stocks, and bonds)

Long-term assets (or non-current assets), on the other hand, are things you don’t plan to convert to cash within a year.

Long-term assets include:

• Buildings and land
• Machinery and equipment (less accumulated depreciation )
• Intangible assets like patents, trademarks, copyrights, and goodwill (you would list the market value of what fair price a buyer might purchase these for)
• Long-term investments

Let’s say you own a vegan catering business called “Where’s the Beef”. As of December 31, your company assets are: money in a checking account, an unpaid invoice for a wedding you just catered, and cookware, dishes and utensils worth $900. Here’s how you’d list your assets on your balance sheet:

Liabilities

Next come your liabilities—your business’s financial obligations and debts.

List your liabilities by their due date. Just like assets, you’ll classify them as current liabilities (due within a year) and non-current liabilities (the due date is more than a year away). These are also known as short-term liabilities and long-term liabilities.

Your current liabilities might include:

• Accounts payable (what you owe suppliers for items you bought on credit)
• Wages you owe to employees for hours they’ve already worked
• Loans that you have to pay back within a year
• Credit card debt

And here are some non-current liabilities:

• Loans that you don’t have to pay back within a year
• Bonds your company has issued

Returning to our catering example, let’s say you haven’t yet paid the latest invoice from your tofu supplier. You also have a business loan, which isn’t due for another 18 months.

Here are Where’s the Beef’s liabilities:

Equity is money currently held by your company. This category is usually called “owner’s equity” for sole proprietorships and “stockholders’ equity” or “shareholders’ equity” for corporations. It shows what belongs to the business owners and the book value of their investments (like common stock, preferred stock, or bonds).

Owners’ equity includes:

• Capital (the amount of money invested into the business by the owners)
• Private or public stock
• Retained earnings (all your revenue minus all your expenses and distributions since launch)

Equity can also drop when an owner draws money out of the company to pay themself, or when a corporation issues dividends to shareholders.

For Where’s the Beef, let’s say you invested $2,500 to launch the business last year, and another $2,500 this year. You’ve also taken $9,000 out of the business to pay yourself and you’ve left some profit in the bank.

Here’s a summary of Where’s the Beef’s equity:

The balance sheet equation

This accounting equation is the key to the balance sheet:

Assets = Liabilities + Owner’s Equity

Assets go on one side, liabilities plus equity go on the other. The two sides must balance—hence the name “balance sheet.”

It makes sense: you pay for your company’s assets by either borrowing money (i.e. increasing your liabilities) or getting money from the owners (equity).

A sample balance sheet

We’re ready to put everything into a standard template ( you can download one here ). Here’s what a sample balance sheet looks like, in a proper balance sheet format:

Nice. Your balance sheet is ready for action.

Great. Now what do I do with it?

Because the balance sheet reflects every transaction since your company started, it reveals your business’s overall financial health. At a glance, you’ll know exactly how much money you’ve put in, or how much debt you’ve accumulated. Or you might compare current assets to current liabilities to make sure you’re able to meet upcoming payments.

You can also compare your latest balance sheet to previous ones to examine how your finances have changed over time. You’ll be able to see just how far you’ve come since day one. If you need help understanding your balance sheet or need help putting together a balance sheet, consider hiring a bookkeeper .

Here’s some metrics you can calculate using your balance sheet:

• Debt-to-equity ratio (D/E ratio): Investors and shareholders are interested in the D/E ratio of a company to understand whether they raise money through investment or debt. A high D/E ratio shows a business relies heavily on loans and financing to raise money.
• Working capital : This metric shows how much cash you would hold if you paid off all your debts. It signals to investors and lenders how capable you are to pay down your current liabilities.
• Return on Assets: A formula for calculating how much net income is being earned relative to the assets owned. The more income earned relative to the amount of assets, the higher performing a business is considered to be.

Next, we’ll cover the three most important ratios that you can calculate using your balance sheet: the current ratio, the debt-to-equity ratio, and the quick ratio.  

The current ratio

Can your company pay its debts? The current ratio measures the liquidity of your company—how much of it can be converted to cash, and used to pay down liabilities. The higher the ratio, the better your financial health in terms of liquidity .

The ratio for finding your current ratio looks like this:

Current Ratio = Current Assets / Current Liabilities

You should aim to maintain a current ratio of 2:1 or higher. Meaning, your company holds twice as much value in assets as it does in liabilities. If you had to, you could pay off all the money you owe two times over.

Once you drop below a current ratio of 2:1, your liquidity isn’t looking so good. And if you dip below 1:1, you’re entering hot water. That means you don’t have enough liquidity to pay off your debts.

You can improve your current ratio by either increasing your assets or decreasing your liabilities.

The quick ratio

Also called the acid test ratio, the quick ratio describes how capable your business is of paying off all its short-term liabilities with cash and near-cash assets. In this case, you don’t include assets like real estate or other long-term investments. You also don’t include current assets that are harder to liquidate, like inventory. The focus is on assets you can easily liquidate.

Here’s how you get the quick ratio:

Quick Ratio = (Cash and Cash Equivalents + Marketable Securities + Accounts Receivable) / Current Liabilities

If your ratio is 1:1 or better, you’re sitting pretty. That means you’ve got enough quick-to-liquidate assets to cover all your short term liabilities in a pinch.

The debt-to-equity ratio

Similar to the current ratio and quick ratio, the debt-to-equity ratio measures your company’s relationship to debt. Only, in this case, the key value is your total equity.

This ratio tells you how much your company depends upon equity to keep running versus how much it depends on outside lenders. It’s calculated like this:

Debt to Equity Ratio = Total Outside Liabilities / Owner or Shareholders’ Equity

Generally speaking, a 2:1 ratio is considered acceptable. If the ratio gets bigger, you start running into trouble. It means your business relies heavily on debt to keep running, which turns off investors. The higher the ratio, the higher the chance that, in the event you need to pay off your debt, you’ll use up all your earnings and cash flows—and investors will end up empty-handed.

Examples of balance sheet analysis

We’ll do a quick, simple analysis of two balance sheets, so you can get a good idea of how to put financial ratios into play and measure your company’s performance.

Annie’s Pottery Palace, a large pottery studio, holds a lot of its current assets in the form of equipment—wheels and kilns for making pottery. Accounts receivable play a relatively minor role.

Liabilities are few—a small loan to pay off within the year, some wages owed to employees, and a couple thousand dollars to pay suppliers.

Annie’s is a single-member LLC—there are no shareholders, so her equity includes only her initial investment, retained earnings, and Annie’s draw($4,000).

Ratio analysis:

Current ratio: 22,000 / 7,000 = 3.14:1

Annie’s current ratio is very healthy. If necessary, her current assets could pay off her current liabilities more than three times over.

Quick ratio: 6,000 / 7,000 = 0.85:1

Her quick ratio isn’t looking so hot, though. Annie’s currently sitting just below 1:1, meaning she wouldn’t be able to quickly pay off debt.

Debt-to-equity ratio: 7,000 / 15,000 = 0.46:1

Annie’s debt-to-equity looks good. She’s got more than twice as much owner’s equity than she does outside liabilities, meaning she’s able to easily pay off all her external debt.

Final analysis:

Annie is able to cover all of her liabilities comfortably—until we take her equipment assets out of the picture. Most of her assets are sunk in equipment, rather than quick-to-cash assets. With this in mind, she might aim to grow her easily liquidated assets by keeping more cash on hand in the business checking account.

That being said, her owner’s equity is more than capable of covering her debt, so this problem shouldn’t be difficult to fix. It would be wise for Annie to take care of it before applying for loans or bringing on investors.

Example balance sheet analysis: Bill’s Book Barn LTD.

A lot of Bill’s assets are tied up in inventory—his large collection of books. The rest mostly consists of long-term investments and intangible assets. (Bill’s Book Barn is famous among collectors of rare fly-tying manuals; a business consultant valued his list of dedicated returning customers at $10,000.)

He doesn’t have a lot of liabilities compared to his assets, and all of them are short-term liabilities. Meaning, he’ll need to pay off that $17,000 within a year.

Finally, since Bill is incorporated, he has issued shares of his business to his brother Garth. Currently, Garth holds a $12,000 share in the business, a little shy of half its total equity.

Ratio analysis

Current ratio: 30,000 / 17,000 = 1.76:1

Since long-term investments and intangible assets are tough to liquidate, they’re not included in current assets—meaning Bill has $30,000 in assets he can more or less easily use to cover his liabilities. His ratio of 1.76:1 isn’t great—it doesn’t leave much wiggle room if he wants to pay off his liabilities. But it isn’t terrible, either—he’s just shy of a healthy 2:1 ratio.

Quick ratio: 7,000 / 17,000 = 0.41:1

Bill’s quick ratio is pretty dire—he’s well short of paying off his liabilities with cash and cash equivalents, leaving him in a bind if he needs to take care of that debt ASAP.

Debt-to-equity ratio: 17,000 / 15,000 = 1.13:1

Once we take into account his $13,000 owner’s draw, Bill’s owner’s equity comes to just $15,000, shy of his $17,000 in debt. Remember, an acceptable debt-to-equity ratio is 2:1. Bill is falling short of acceptable; if he had to pay off all his debts quickly, his equity wouldn’t cover it, and he’d need to dip into his company’s income. That makes his business unattractive to potential investors. Unless he changes course, Bill will have trouble getting financing for his business in the future.

Summary Analysis

Bill’s ratios don’t look great, but there’s hope. If he starts liquidating some of his long-term investments now, he can bump his current ratio up to 2:1, meaning he’d be in a healthy position to pay off liabilities with his current assets.

His quick ratio will take more work to improve. A lot of Bill’s assets are tied up in inventory. If he could convert some of that inventory to cash, he could improve his ability to pay of debt quickly in an emergency. He may want to take a look at his inventory, and see what he can liquidate. Maybe he’s got shelves full of books that have been gathering dust for years. If he can sell them off to another bookseller as a lot, maybe he can raise the $10,000 cash to become more financially stable.

Finally, unless he improves his debt-to-equity ratio, Bill’s brother Garth is the only person who will ever invest in his business. The situation could be improved considerably if Bill reduced his $13,000 owner’s draw. Unfortunately, he’s addicted to collecting extremely rare 18th century guides to bookkeeping. Until he can get his bibliophilia under control, his equity will continue to suffer.

Balance sheets can tell you a lot of information about your business, and help you plan strategically to make it more liquid, financially stable, and appealing to investors. But unless you use them in tandem with income statements and cash flow statements, you’re only getting part of the picture. Learn how they work together with our complete guide to financial statements .

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How To Prepare a Balance Sheet: A Step-by-Step Guide

Why should you create a balance sheet?

4 tasks to complete before preparing a balance sheet, use this guide to learn what goes into preparing an accurate balance sheet..

As an entrepreneur or a business owner, one of the biggest mistakes you can make is not taking the time to study your company’s financial statements. And worse still, not preparing them at all.

A balance sheet is among the most notable financial statements used to monitor the financial health of your business. For management, it informs internal decision-making, and for lenders and investors, it offers a quick look into your company's capability to make profits and pay back debt.

You can prepare a balance sheet on your own or hire accountants and bookkeepers to do it for you. Another way is to hand over the responsibility to an outside specialist firm by outsourcing the job. No matter which path you take, it’s important to understand how a balance sheet works as well as the basic steps to prepare it.

This article is for anyone who wants to understand how to prepare a balance sheet, which is often used by investors, creditors, and management. We explain why and how to create one as well as suggest technology tools to simplify your job.

A balance sheet summarizes your firm’s current financial worth by showing the value of what it owns (assets) minus what it owes (liabilities). It can be understood with a simple accounting equation:

Assets = Liabilities + Shareholders’ Equity

Preparing a balance is like creating a blown-up version of the above equation by vertically dividing the sheet into two parts with assets listed on the left, and claims of owners (equity) and liabilities are on the right. The two sides must always be equal.

The purpose of creating a balance sheet is to know the financial position of your business, particularly what it owns and what it owes by the end of an accounting period (usually after every 12 months). Therefore, a balance sheet is also called a position statement or a statement of financial position—it provides a snapshot of all assets and liabilities at a particular point in time.

Three ways using a balance sheet benefits your business:

It provides the basis for assessing risks and returns. By comparing your current assets against current liabilities, you can determine if you have enough capital to cover short-term debts (e.g., wages, lease payments) or if you need more to run everyday operations.

It’s instrumental in securing loans and investments. Most lenders and investors assess the balance sheet to see if your business can collect payments from clients, repay debts on time, and manage assets responsibly.

It shows the long-term sustainability of your business. By analyzing your balance sheet and finding out appropriate financial ratios from it, you can assess your business’s position in terms of profitability, productivity, and liquidity. You can also use these ratios to compare your performance against competitors’.

To create a balance sheet, you have to follow an order and prepare a few things first—like you would have to do for many other business processes.

1. Adjust entries in the general journal

Adjusting journal entries is necessary before preparing the four basic financial statements , including the balance sheet. It means updating your accounts at the end of an accounting period for items that are not recorded in your journal.

For instance, if you delivered goods worth $5,000 on the last day of the month but didn’t receive the amount until the next accounting period, then you’ll need to adjust your journal entry. Update your accounts by making such adjusting entries in the general journal.

What is a general journal?

A general journal is the first place where daily business transactions are recorded by date. Depending upon the practice followed in an organization, some may keep specialized journals such as a sales journal, cash receipts journal, and purchase journal to record specific types of transactions.

2. Post general journal transactions to the general ledger

After transactions are recorded and adjusted for in the general journal, they are transferred to appropriate sub-ledger accounts, such as sales, purchase, accounts receivable, inventory, and cash. This process is called posting.

While a general journal records business transactions on an everyday basis, general ledgers group these transactions by their accounts. The accounts are then aggregated to a general ledger at the end of the accounting period. The general ledger acts as a collection of all accounts and is used to prepare the balance sheet and the profit and loss statement.

3. Generate the final trial balance

Once you have adjusted journal entries and posted them in the general ledger, construct a final trial balance. Trial balance is a report that lists general ledger accounts and adds up their balances. Generating the trial balance report makes it much easier to check and locate any errors in the overall accounts.

The sum of all debits must always equal the sum of all credits in a trial balance report. If it doesn’t, it means there are errors you need to track down. You may have missed a transaction or calculated something incorrectly.

Use software for bookkeeping

Accurately recording financial data is a prerequisite for effective financial reporting. Indeed, you can still do your bookkeeping with pencil and paper. But, manual bookkeeping takes much longer and leaves space for human errors.

All accounting software tools generate trial balance as a standard report. You can streamline everyday bookkeeping tasks and ensure bookkeeping accuracy using accounting software .

4. Generate the income statement

An income statement is prepared before a balance sheet to calculate net income, which is the key to completing a balance sheet. Net income is the final amount mentioned in the bottom line of the income statement, showing the profit or loss to your business. Net income is added to the retained earnings accounts (income left after paying dividends to shareholders) listed under the equity section of the balance sheet.

Prepare an income statement by taking income and expense items (such as sales) from the trial balance and organizing them in a proper format.

Now that you understand the basics, let’s discuss (in the next section) the six steps to prepare a balance sheet.

Step #1: Determine a reporting date for the balance sheet

A balance sheet determines the financial position of your business at a particular point in time, not for a period. Thus, the header of a balance sheet always reads “as on a specific date” (e.g., as on Dec. 31, 2021).

A balance sheet is usually prepared at the end of a financial year (typically every 12 months on the last day of March or December), but it can be created at any or multiple points in time, say quarterly or half-yearly.

Step #2: Collect accounts that go on the balance sheet

From all the accounts mentioned in the general ledger and trial balance report, the balance sheet shows only the permanent accounts ( e.g., cash, fixed assets). Permanent accounts are those accounts whose balances are carried over to the next period.

Identify these accounts and note their balances. An example of permanent accounts or balance sheet accounts on a trial balance report is given below.

Illustration of balance sheet accounts in a trial balance report

Step #3: Calculate the total assets

The next step is to identify accounts from your trial balance that represent what you own—in other words, your assets such as cash and inventory. List them on the left to create the asset side of the balance sheet. You can classify asset accounts further into two types: current and noncurrent.

Current assets include assets that can be converted into cash as early as possible (typically within the next 12 months). Current asset accounts include cash, accounts receivable, and inventory.

Cash refers to both cash in hand and at the bank.

Accounts receivable refers to transactions for which money is yet to come from your customers—i.e., the amount you are owed.

Inventory is usually the biggest portion of current assets. On the balance sheet, it includes goods that are ready for sale as well as raw materials or half-done products.

Noncurrent assets include assets that cannot be converted into cash within the next 12 months. They are used to run daily business operations. Examples are plant/factory, machinery, furniture, and patents and copyrights (intangible assets).

List the values of each current and noncurrent asset component from the trial balance account, and add up the total current assets and the total noncurrent assets to calculate the grand total of assets.

Step #4: Calculate the total liabilities

Identify accounts from your trial balance that represent what you owe—in other words, your liabilities such as accounts payable (bills that you need to pay) and loans. List them on the right to create the liability side of the balance sheet. You can classify liability accounts further into two types: current and noncurrent liabilities.

Current liabilities are obligations or debts that are payable soon, usually within the next 12 months. They are also called short-term liabilities. Accounts payable and accrued payroll taxes are some commonly used current liability accounts.

Accounts payable includes bills or transactions for which money is yet to be paid to the suppliers or creditors. This is the amount you owe to others.

Accrued payroll taxes include the part of compensation your firm owes to employees and hasn’t been paid yet for the year, such as bonuses.

Noncurrent liabilities are obligations that will take more than the next 12 months to be repaid. They are also known as long-term liabilities. Examples include employees’ pensions.

List the values of each current and noncurrent liability component from the trial balance account, and add up the total current liabilities and the total noncurrent liabilities to calculate the grand total of liabilities.

Step #5: Arrange assets and liabilities in proper order

Once you have the assets and liabilities sections ready and sorted, arrange them in proper order. Assets should be arranged in the order of liquidity and liabilities in the order of discharge ability.

Arranging assets in the order of liquidity means putting assets that can be readily converted into cash at the top of the list and more permanent assets at the bottom. Similarly, arranging liabilities in the order of discharge ability means putting short-term obligations that are payable in the immediate future first and long-term and more permanent liabilities at the bottom.

Step #6: Calculate shareholders’ equity

Mention shareholders’ equity on the right side of the balance sheet, right below the liabilities section. Shareholders’ equity, also known as the net worth of a company, shows the value of your business if it were to be liquidated or closed down.

It includes two types of investments: capital contributed by investors/owners and the earnings or losses accumulated in the business. The most common accounts listed under shareholders’ equity are common stock, preferred stock, treasury stock, and retained earnings.

Common and preferred stocks are the shares issued by a company. Common shares give voting rights to the owners, but in the event of a company being closed, common shareholders are paid back only after preferred shareholders.

Treasury stock refers to the shares repurchased from investors to protect the firm from a hostile takeover.

Retained earnings include earnings that are reinvested in the business. It’s calculated by adding net income to previous period’s retained earnings and deducting the amount paid to investors as a share of profits.

List the values of each shareholders’ equity component from the trial balance account, and add them up to calculate total owners’ liabilities. Next, calculate the total liabilities and shareholders’ equity by adding the final sum from step 4 and step 6.

Once this is done, you’ll have a complete balance sheet ready for you. Make sure the balance on the left side matches the balance on the right. If not, check your values again.

Illustration of a balance sheet with total assets matching total liabilities and owners’ equity

Prepared the balance sheet for your business? Check out how to analyze the numbers on your balance sheet to gain actionable insights into your financial health.

The integrity of a balance sheet is directly related to the information that goes into its preparation. Like most of your accounting tasks, accounting software can revamp recordkeeping and do much of the legwork while reducing errors. Use it to build a general ledger and trial balance with ease.

Doing key calculations and finding appropriate accounting ratios, such as working capital and debt-to-equity ratio, are key to analyzing your balance sheet. Financial reporting applications can help you interpret these ratios and understand the balance sheet.

Prepare a cover letter explaining the key points in the balance sheet when sending it to business leaders. Doing this will establish effective financial reporting practices that bring value to your business.

Thinking about hiring an accounting firm for help preparing your balance sheet? Browse our list of top accounting firms and learn more about their services in Capterra’s hiring guide .

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Amita Jain is a senior writer for Capterra, covering finance technology with a focus on expense management and accounting solutions for small-to-midsize businesses. After completing her master’s in policy studies from King’s College London, she began her career as a journalist in New Delhi, India, where she garnered first-hand knowledge of the startup space and the education sector. She spent nearly half a decade covering high-level events hosted by the United Nations and the Government of India. Her work has been featured in Gartner and Careers360, among other publications.

Amita’s research and writing for Capterra is informed by more than 130,000 authentic user reviews and over 30,000 interactions between Capterra software advisors and software buyers. Amita also regularly speaks to leaders in the finance and accounting space so she can provide the most up-to-date and helpful information to small and midsize businesses purchasing software or services.

When she’s not contemplating tech solutions for SMBs, Amita finds her zen in swimming, doodling, and indulging in animated sitcoms and science fiction.

Rina is a senior editor at Capterra. She has close to a decade of experience creating and editing content, especially for the IT, software, and finance domains. Passionate about minimalist storytelling, she prioritizes breaking down complex industry jargon into engaging stories accessible to all readers.

Rina holds a postgraduate degree in mass communication and journalism and a bachelor's degree in English literature. She started her career as a features writer for The Times of India, India’s premier English daily newspaper. Outside of work, she’s a doting mother to her dog daughter Puppy, a budding resin artist, and a proponent of financial literacy for women.

RELATED READING

Business Plan Balance Sheet: Everything You Need to Know

Preparing a business plan balance sheet is an important part of starting your own business. 3 min read updated on February 01, 2023

Preparing a business plan balance sheet is an important part of starting your own business. The balance sheet serves as one of three crucial parts of the company's financials along with cash flow and the income statement. The basics of the balance sheet include a few straightforward parts:

• Company assets.
• Liabilities.
• Owner's equity.

The balance sheet will also include income and spending that isn't represented in the profit and loss statement. For example, it will show loan repayments and the purchase of new assets. Additionally, the money that is taken in as a new loan will not show up on the P & L either.

Accounts receivable, or the money you are waiting to receive from your customers, will show up as an asset on your balance sheet and as it is not yet reported as income on your P & L statement. A balance sheet is your business's representation of why your profits are not yet considered cash. It creates the broad financial picture of your business while the profit and loss statement will show the company's financial performance over a set length of time.

A balance sheet always has to balance. It will have assets on one side and liabilities and equity on the other. The basic formula that a balance sheet follows is Assets = Liabilities + Equity. In the end, it is the balance sheet that will show a company's net worth. To determine net worth at any given time, all you need to do is subtract the liabilities from the assets.

Balance sheets are used for planning and not accounting which is one of the principles of lean business planning. To get a useful cash flow projection, you will need to summarize the aggregate of the rows on the balance sheet. It is always important to look at a balance sheet as a tool to forecast your cash.

Components of a Balance Sheet

Just as one business will differ from another, so will the assets and liabilities of the business. Even though the titles will vary, the equation and goal remains the same. You will need to have your business assets equal your liabilities and equity .

The assets on your balance sheet will often be in order from the top to the bottom with how easy they can be converted to cash. This is called liquidity . Your most liquid assets will be on top and your least liquid on the bottom. Typically assets will be listed as follows:

• Cash — This is money currently on hands such as in checking and savings accounts. It can also include money market accounts that can be converted to cash quickly.
• Accounts Receivable — This represents money that is owed to you but has not actually been received yet. This is often credit that is extended to customers through invoicing.
• Inventory — This includes all the finished goods and materials that are ready at your place of business but has yet to be sold.
• Current Assets — These are assets that can be considered able to be converted into cash within a year or less. This includes all your cash, accounts receivable, and inventory which will all be grouped together as current assets.
• Long-Term Assets — These are fixed assets that have a long-standing value such as land and equipment. They cannot be converted to cash as quickly.
• Accumulated Depreciation — This is the value that your assets will be reduced over time due to depreciation.
• Long-Term Assets — This is the total of long-term assets plus depreciation.

Liabilities

Liabilities will be ordered for time it would take to pay them off, with current liabilities needing to be paid in a year or less and long-term liabilities longer than a year.

• Accounts Payable — This is the amount of money that your business will owe to vendors or for regular bills.
• Sales Tax Payable — If your sales tax is not paid right away, it will accrue in this account until payment is made.
• Short-Term Debt — This is usually short-term loans that will be repaid in less than a year.
• Total Current Liabilities — The total amount of debt that the business will need to pay back in a year.
• Long-Term Debt — This amount includes the financial responsibilities that will take more than a year to pay back.

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Balance Sheet: Definition, Uses and How to Create One

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The balance sheet summarizes your business's financial status as of a certain date. It follows the accounting equation: Assets = Liabilities + Owner's equity. In non-accounting terms, the balance sheet tells you what your business owns (assets), what it owes (liabilities), and what the owner's stake in the business is (equity).

If you think of your financial statements as the story of your business, then the balance sheet serves as the CliffsNotes version of that story. Every transaction in your business impacts the balance sheet in some way.

» MORE: Nine basic accounting concepts every business owner should know

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What does a balance sheet include?

The balance sheet includes three broad categories of information:

Liabilities.

Owner's equity.

Assets are the things your business owns. Most balance sheets break down assets into two subcategories.

Current assets are cash, cash equivalents, and things that can be easily converted into cash within the next 12 months. Your bank accounts, petty cash, accounts receivable (amounts customers owe to you), and inventory are all examples of current assets.

Fixed assets are things your business owns that aren't likely to be converted into cash (sold) within a 12-month period. This includes land, buildings, heavy equipment, vehicles, and long-term loans to customers. Some businesses also have intangible assets, like trademarks and patents, listed under fixed assets on their balance sheets.

Liabilities

Liabilities are amounts your business owes to others. As with assets, most balance sheets break down liabilities into two subcategories.

Current liabilities are amounts you are likely to pay within the next 12 months. This includes amounts due to vendors for utilities and inventory (accounts payable), credit card balances, sales tax and payroll taxes you've collected but not yet submitted to the government, and the portion of loan balances due within the next 12 months. In addition, if you have a line of credit for your business, that will usually be listed as a current liability on your balance sheet.

Long-term liabilities are amounts due in the future beyond the next 12 months. This would include the mortgage on your building, vehicle loans, and long-term leases.

Equity balances out the difference between assets and liabilities. It is your stake in the business. You can also look at equity as the amount the business owes to you.

Equity consists of:

Contributions you have made to the business (startup cash you invested, additional paid-in capital, etc.)

Retained earnings (amounts you have left in the business over time.)

Capital and preferred stock, if your business has other shareholders.

The current year's net income (from your profit and loss statement).

Let's look back at the accounting equation the balance sheet follows:

Assets = Liabilities + Equity.

Another way to look at this equation is

Assets - Liabilities = Equity.

In other words, equity is what is left for the business owner after all the liabilities are paid from the business's assets. Equity will be negative if a business's liabilities exceed its assets. This means the business owner might have to use their own money to pay the business's debts if it closes immediately. Negative equity can also negatively impact the selling price of the business.

» MORE: Best accounting software for small businesses

What does a balance sheet exclude?

The balance sheet excludes detailed information about the business's income and expenses. Instead, this detail is included in the business's profit and loss statement.

But remember: Every transaction in your business impacts the balance sheet in some way. Your business's income and expenses are summarized on the balance sheet as Net Income under the Equity section.

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How can you make a balance sheet?

If your business is new and simple, you can create a manual balance sheet using the accounting formula. First, list your current bank account balances (assets), subtract any loans or amounts due to others (liabilities), and what is left is your equity in the business.

However, most businesses must rely on their accounting software to create an accurate balance sheet. The balance sheet is a standard report in all double-entry bookkeeping software.

To create a balance sheet in your accounting software, go to the reports section and look for financial reports. Since it is a common financial statement, the balance sheet should appear near the top of the list, often right after the profit and loss (or income) statement.

Some accounting software prompts you to enter a date range for the balance sheet report. This isn't wrong, per se, but it can be confusing. Unlike the profit and loss statement, which only shows information for a certain period, the balance sheet shows information as of a specific date. And that information includes a financial summary of your business from its start through the "as of" date on the balance sheet.

The purpose of the balance sheet

Before the advent of double-entry bookkeeping software, the balance sheet ensured the accuracy of a business's bookkeeping. For example, if the balance sheet was out of balance — meaning assets weren't equal to the combined value of liabilities and equity — then that indicated an error in the books.

Today's accounting software won't let you post an unbalanced transaction, so finding an out-of-balance balance sheet is rare. In fact, an unbalanced balance sheet usually indicates a technical problem inside the software. But that doesn't mean the balance sheet is obsolete. On the contrary, the balance sheet is an essential tool to help you — and potential investors — analyze your company's health at a glance and make sound business decisions.

» MORE: Chart of accounts: Definition, guide and examples

How the balance sheet can help you make business decisions

You can quickly analyze your business's financial health with a glance at the balance sheet. If equity is negative — meaning liabilities are greater than assets — that could indicate your business is in financial trouble. It would be best to meet with an accountant to discuss ways to increase your assets or decrease your liabilities, so your stake in the business is no longer negative.

If you want to go beyond a glance, you can quickly calculate three critical metrics from your business's balance sheet.

Current ratio

The current ratio measures your business's ability to pay your current liabilities. The formula is:

Current assets / Current liabilities = Current ratio

The current ratio tells you how many times your business can pay its current liabilities from the cash on hand. Anything less than 1 indicates your business does not have enough cash or cash equivalents to pay amounts due in the next 12 months.

Quick ratio

The quick ratio formula is:

(Cash & cash equivalents + Short-term investments + Accounts receivable) / Current liabilities = Quick ratio

The quick ratio is a measure of liquidity and is often the same as the current ratio.

Debt to equity ratio

The debt-to-equity ratio tells you how leveraged your business is or how much of your business is financed with debt. The formula is:

Total liabilities / Total equity = Debt-to-equity ratio

Notice that now we're looking at total liabilities — including long-term debt. A good debt-to-equity ratio is between 1 and 1.5. Anything higher than that can indicate your business is highly leveraged. This could make it harder to get financing at a favorable rate.

Other considerations

These ratios are good quick measurements of your business's performance in certain critical areas, but they don't tell the whole story. To make the best decisions for your business, you should review the balance sheet alongside the profit and loss statement and statement of cash flows. Enlisting the help of an accountant who knows your business and your industry is also key to using your balance sheet to make business decisions.

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How to Write the Financial Section of a Business Plan

Susan Ward wrote about small businesses for The Balance for 18 years. She has run an IT consulting firm and designed and presented courses on how to promote small businesses.

Taking Stock of Expenses

The income statement, the cash flow projection, the balance sheet.

The financial section of your business plan determines whether or not your business idea is viable and will be the focus of any investors who may be attracted to your business idea. The financial section is composed of four financial statements: the income statement, the cash flow projection, the balance sheet, and the statement of shareholders' equity. It also should include a brief explanation and analysis of these four statements.

Think of your business expenses as two cost categories: your start-up expenses and your operating expenses. All the costs of getting your business up and running should be considered start-up expenses. These may include:

• Business registration fees
• Business licensing and permits
• Starting inventory
• Rent deposits
• Down payments on a property
• Down payments on equipment
• Utility setup fees

Your own list will expand as soon as you start to itemize them.

Operating expenses are the costs of keeping your business running . Think of these as your monthly expenses. Your list of operating expenses may include:

• Salaries (including your own)
• Rent or mortgage payments
• Telecommunication expenses
• Raw materials
• Distribution
• Loan payments
• Office supplies
• Maintenance

Once you have listed all of your operating expenses, the total will reflect the monthly cost of operating your business. Multiply this number by six, and you have a six-month estimate of your operating expenses. Adding this amount to your total startup expenses list, and you have a ballpark figure for your complete start-up costs.

Now you can begin to put together your financial statements for your business plan starting with the income statement.

The income statement shows your revenues, expenses, and profit for a particular period—a snapshot of your business that shows whether or not your business is profitable. Subtract expenses from your revenue to determine your profit or loss.

While established businesses normally produce an income statement each fiscal quarter or once each fiscal year, for the purposes of the business plan, an income statement should be generated monthly for the first year.

Not all of the categories in this income statement will apply to your business. Eliminate those that do not apply, and add categories where necessary to adapt this template to your business.

If you have a product-based business, the revenue section of the income statement will look different. Revenue will be called sales, and you should account for any inventory.

The cash flow projection shows how cash is expected to flow in and out of your business. It is an important tool for cash flow management because it indicates when your expenditures are too high or if you might need a short-term investment to deal with a cash flow surplus. As part of your business plan, the cash flow projection will show how  much capital investment  your business idea needs.

For investors, the cash flow projection shows whether your business is a good credit risk and if there is enough cash on hand to make your business a good candidate for a line of credit, a  short-term loan , or a longer-term investment. You should include cash flow projections for each month over one year in the financial section of your business plan.

Do not confuse the cash flow projection with the cash flow statement. The cash flow statement shows the flow of cash in and out of your business. In other words, it describes the cash flow that has occurred in the past. The cash flow projection shows the cash that is anticipated to be generated or expended over a chosen period in the future.

There are three parts to the cash flow projection:

• Cash revenues: Enter your estimated sales figures for each month. Only enter the sales that are collectible in cash during each month you are detailing.
• Cash disbursements: Take the various expense categories from your ledger and list the cash expenditures you actually expect to pay for each month.
• Reconciliation of cash revenues to cash disbursements: This section shows an opening balance, which is the carryover from the previous month's operations. The current month's revenues are added to this balance, the current month's disbursements are subtracted, and the adjusted cash flow balance is carried over to the next month.

The balance sheet reports your business's net worth at a particular point in time. It summarizes all the financial data about your business in three categories:

• Assets :  Tangible objects of financial value that are owned by the company.
• Liabilities: Debt owed to a creditor of the company.
• Equity: The net difference when the  total liabilities  are subtracted from the total assets.

The relationship between these elements of financial data is expressed with the equation: Assets = Liabilities + Equity .

For your  business plan , you should create a pro forma balance sheet that summarizes the information in the income statement and cash flow projections. A business typically prepares a balance sheet once a year.

Once your balance sheet is complete, write a brief analysis for each of the three financial statements. The analysis should be short with highlights rather than in-depth analysis. The financial statements themselves should be placed in your business plan's appendices.

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What Is a Balance Sheet?

How balance sheets work, special considerations.

• Why Is It Important?
• Limitations
• Balance Sheet FAQs
• Corporate Finance
• Financial statements: Balance, income, cash flow, and equity

Balance Sheet: Explanation, Components, and Examples

What you need to know about these financial statements

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The term balance sheet refers to a financial statement that reports a company's assets, liabilities, and shareholder equity at a specific point in time. Balance sheets provide the basis for computing rates of return for investors and evaluating a company's capital structure .

In short, the balance sheet is a financial statement that provides a snapshot of what a company owns and owes, as well as the amount invested by shareholders. Balance sheets can be used with other important financial statements to conduct fundamental analysis or calculate financial ratios.

Key Takeaways

• A balance sheet is a financial statement that reports a company's assets, liabilities, and shareholder equity.
• The balance sheet is one of the three core financial statements that are used to evaluate a business.
• It provides a snapshot of a company's finances (what it owns and owes) as of the date of publication.
• The balance sheet adheres to an equation that equates assets with the sum of liabilities and shareholder equity.
• Fundamental analysts use balance sheets to calculate financial ratios.

Investopedia / Katie Kerpel

The balance sheet provides an overview of the state of a company's finances at a moment in time. It cannot give a sense of the trends playing out over a longer period on its own. For this reason, the balance sheet should be compared with those of previous periods.

Investors can get a sense of a company's financial well-being by using a number of ratios that can be derived from a balance sheet, including the debt-to-equity ratio and the acid-test ratio , along with many others. The income statement and statement of cash flows also provide valuable context for assessing a company's finances, as do any notes or addenda in an earnings report that might refer back to the balance sheet.

The balance sheet adheres to the following accounting equation, with assets on one side, and liabilities plus shareholder equity on the other, balance out:

Assets = Liabilities + Shareholders’ Equity \text{Assets} = \text{Liabilities} + \text{Shareholders' Equity} Assets = Liabilities + Shareholders’ Equity

This formula is intuitive. That's because a company has to pay for all the things it owns (assets) by either borrowing money (taking on liabilities) or taking it from investors (issuing shareholder equity).

If a company takes out a five-year, $4,000 loan from a bank, its assets (specifically, the cash account) will increase by $4,000. Its liabilities (specifically, the long-term debt account ) will also increase by $4,000, balancing the two sides of the equation. If the company takes $8,000 from investors, its assets will increase by that amount, as will its shareholder equity. All revenues the company generates in excess of its expenses will go into the shareholder equity account. These revenues will be balanced on the assets side, appearing as cash, investments, inventory, or other assets.

Balance sheets should also be compared with those of other businesses in the same industry since different industries have unique approaches to financing.

As noted above, you can find information about assets, liabilities, and shareholder equity on a company's balance sheet. The assets should always equal the liabilities and shareholder equity. This means that the balance sheet should always balance , hence the name. If they don't balance, there may be some problems, including incorrect or misplaced data, inventory or exchange rate errors, or miscalculations.

Each category consists of several smaller accounts that break down the specifics of a company's finances. These accounts vary widely by industry, and the same terms can have different implications depending on the nature of the business. Companies might choose to use a form of balance sheet known as the common size , which shows percentages along with the numerical values. This type of report allows for a quick comparison of items.

There are a few common components that investors are likely to come across.

 Theresa Chiechi {Copyright} Investopedia, 2019.

Components of a Balance Sheet

Accounts within this segment are listed from top to bottom in order of their liquidity . This is the ease with which they can be converted into cash. They are divided into current assets, which can be converted to cash in one year or less; and non-current or long-term assets, which cannot.

Here is the general order of accounts within current assets:

• Cash and cash equivalents are the most liquid assets and can include Treasury bills and short-term certificates of deposit, as well as hard currency.
• Marketable securities are equity and debt securities for which there is a liquid market.
• Accounts receivable (AR) refer to money that customers owe the company. This may include an allowance for doubtful accounts as some customers may not pay what they owe.
• Inventory refers to any goods available for sale, valued at the lower of the cost or market price.
• Prepaid expenses represent the value that has already been paid for, such as insurance, advertising contracts, or rent.

Long-term assets include the following:

• Long-term investments are securities that will not or cannot be liquidated in the next year.
• Fixed assets include land, machinery, equipment, buildings, and other durable, generally capital-intensive assets.
• Intangible assets include non-physical (but still valuable) assets such as intellectual property and goodwill. These assets are generally only listed on the balance sheet if they are acquired, rather than developed in-house. Their value may thus be wildly understated (by not including a globally recognized logo, for example) or just as wildly overstated.

Liabilities

A liability is any money that a company owes to outside parties, from bills it has to pay to suppliers to interest on bonds issued to creditors to rent, utilities and salaries. Current liabilities are due within one year and are listed in order of their due date. Long-term liabilities, on the other hand, are due at any point after one year.

Current liabilities accounts might include:

• Current portion of long-term debt is the portion of a long-term debt due within the next 12 months. For example, if a company has a 10 years left on a loan to pay for its warehouse, 1 year is a current liability and 9 years is a long-term liability.
• Interest payable is accumulated interest owed, often due as part of a past-due obligation such as late remittance on property taxes.
• Wages payable is salaries, wages, and benefits to employees, often for the most recent pay period.
• Customer prepayments is money received by a customer before the service has been provided or product delivered. The company has an obligation to (a) provide that good or service or (b) return the customer's money.
• Dividends payable is dividends that have been authorized for payment but have not yet been issued.
• Earned and unearned premiums is similar to prepayments in that a company has received money upfront, has not yet executed on their portion of an agreement, and must return unearned cash if they fail to execute.
• Accounts payable is often the most common current liability. Accounts payable is debt obligations on invoices processed as part of the operation of a business that are often due within 30 days of receipt.

Long-term liabilities can include:

• Long-term debt includes any interest and principal on bonds issued
• Pension fund liability refers to the money a company is required to pay into its employees' retirement accounts
• Deferred tax liability is the amount of taxes that accrued but will not be paid for another year. Besides timing, this figure reconciles differences between requirements for financial reporting and the way tax is assessed, such as depreciation calculations.

Some liabilities are considered off the balance sheet, meaning they do not appear on the balance sheet.

Shareholder Equity

Shareholder equity is the money attributable to the owners of a business or its shareholders. It is also known as net assets since it is equivalent to the total assets of a company minus its liabilities or the debt it owes to non-shareholders.

Retained earnings are the net earnings a company either reinvests in the business or uses to pay off debt. The remaining amount is distributed to shareholders in the form of dividends.

Treasury stock is the stock a company has repurchased. It can be sold at a later date to raise cash or reserved to repel a hostile takeover .

Some companies issue preferred stock , which will be listed separately from common stock under this section. Preferred stock is assigned an arbitrary par value (as is common stock, in some cases) that has no bearing on the market value of the shares. The common stock and preferred stock accounts are calculated by multiplying the par value by the number of shares issued.

Additional paid-in capital or capital surplus represents the amount shareholders have invested in excess of the common or preferred stock accounts, which are based on par value rather than market price. Shareholder equity is not directly related to a company's market capitalization . The latter is based on the current price of a stock, while paid-in capital is the sum of the equity that has been purchased at any price.

Par value is often just a very small amount, such as $0.01.

Importance of a Balance Sheet

Regardless of the size of a company or industry in which it operates, there are many benefits of reading, analyzing, and understanding its balance sheet.

First, balance sheets help to determine risk. This financial statement lists everything a company owns and all of its debt. A company will be able to quickly assess whether it has borrowed too much money, whether the assets it owns are not liquid enough, or whether it has enough cash on hand to meet current demands.

Balance sheets are also used to secure capital. A company usually must provide a balance sheet to a lender in order to secure a business loan. A company must also usually provide a balance sheet to private investors when attempting to secure private equity funding. In both cases, the external party wants to assess the financial health of a company, the creditworthiness of the business, and whether the company will be able to repay its short-term debts.

Managers can opt to use financial ratios to measure the liquidity, profitability, solvency, and cadence (turnover) of a company using financial ratios, and some financial ratios need numbers taken from the balance sheet. When analyzed over time or comparatively against competing companies, managers can better understand ways to improve the financial health of a company.

Last, balance sheets can lure and retain talent. Employees usually prefer knowing their jobs are secure and that the company they are working for is in good health. For public companies that must disclose their balance sheet, this requirement gives employees a chance to review how much cash the company has on hand, whether the company is making smart decisions when managing debt, and whether they feel the company's financial health is in line with what they expect from their employer.

Limitations of a Balance Sheet

Although the balance sheet is an invaluable piece of information for investors and analysts, there are some drawbacks. Because it is static, many financial ratios draw on data included in both the balance sheet and the more dynamic income statement and statement of cash flows to paint a fuller picture of what's going on with a company's business. For this reason, a balance alone may not paint the full picture of a company's financial health.

A balance sheet is limited due its narrow scope of timing. The financial statement only captures the financial position of a company on a specific day. Looking at a single balance sheet by itself may make it difficult to extract whether a company is performing well. For example, imagine a company reports $1,000,000 of cash on hand at the end of the month. Without context, a comparative point, knowledge of its previous cash balance, and an understanding of industry operating demands, knowing how much cash on hand a company has yields limited value.

Different accounting systems and ways of dealing with depreciation and inventories will also change the figures posted to a balance sheet. Because of this, managers have some ability to game the numbers to look more favorable. Pay attention to the balance sheet's footnotes in order to determine which systems are being used in their accounting and to look out for red flags .

Last, a balance sheet is subject to several areas of professional judgement that may materially impact the report. For example, accounts receivable must be continually assessed for impairment and adjusted to reflect potential uncollectible accounts. Without knowing which receivables a company is likely to actually receive, a company must make estimates and reflect their best guess as part of the balance sheet.

Example of a Balance Sheet

The image below is an example of a comparative balance sheet of Apple, Inc . This balance sheet compares the financial position of the company as of September 2020 to the financial position of the company from the year prior.

In this example, Apple's total assets of $323.8 billion is segregated towards the top of the report. This asset section is broken into current assets and non-current assets, and each of these categories is broken into more specific accounts. A brief review of Apple's assets shows that their cash on hand decreased, yet their non-current assets increased.

This balance sheet also reports Apple's liabilities and equity, each with its own section in the lower half of the report. The liabilities section is broken out similarly as the assets section, with current liabilities and non-current liabilities reporting balances by account. The total shareholder's equity section reports common stock value, retained earnings, and accumulated other comprehensive income. Apple's total liabilities increased, total equity decreased, and the combination of the two reconcile to the company's total assets.

Why Is a Balance Sheet Important?

The balance sheet is an essential tool used by executives, investors, analysts, and regulators to understand the current financial health of a business. It is generally used alongside the two other types of financial statements: the income statement and the cash flow statement.

Balance sheets allow the user to get an at-a-glance view of the assets and liabilities of the company. The balance sheet can help users answer questions such as whether the company has a positive net worth, whether it has enough cash and short-term assets to cover its obligations, and whether the company is highly indebted relative to its peers.

What Is Included in the Balance Sheet?

The balance sheet includes information about a company’s assets and liabilities. Depending on the company, this might include short-term assets, such as cash and accounts receivable , or long-term assets such as property, plant, and equipment (PP&E). Likewise, its liabilities may include short-term obligations such as accounts payable and wages payable, or long-term liabilities such as bank loans and other debt obligations.

Who Prepares the Balance Sheet?

Depending on the company, different parties may be responsible for preparing the balance sheet. For small privately-held businesses , the balance sheet might be prepared by the owner or by a company bookkeeper. For mid-size private firms, they might be prepared internally and then looked over by an external accountant.

Public companies, on the other hand, are required to obtain external audits by public accountants, and must also ensure that their books are kept to a much higher standard. The balance sheets and other financial statements of these companies must be prepared in accordance with Generally Accepted Accounting Principles (GAAP) and must be filed regularly with the Securities and Exchange Commission (SEC) .

What Are the Uses of a Balance Sheet?

A balance sheet explains the financial position of a company at a specific point in time. As opposed to an income statement which reports financial information over a period of time, a balance sheet is used to determine the health of a company on a specific day.

A bank statement is often used by parties outside of a company to gauge the company's health. Banks, lenders, and other institutions may calculate financial ratios off of the balance sheet balances to gauge how much risk a company carries, how liquid its assets are, and how likely the company will remain solvent.

A company can use its balance sheet to craft internal decisions, though the information presented is usually not as helpful as an income statement. A company may look at its balance sheet to measure risk, make sure it has enough cash on hand, and evaluate how it wants to raise more capital (through debt or equity).

What Is the Balance Sheet Formula?

In accounting, the footing is the final balance obtained by adding all the debits and credits. A balance sheet, an important financial tool, calculates a company's assets with its liabilities and equity. Total assets are calculated as the sum of all short-term, long-term, and other assets. Total liabilities are calculated as the sum of all short-term, long-term, and other liabilities. Total equity is calculated as the sum of net income, retained earnings, owner contributions, and shares of stock issued. The formula is: total assets = total liabilities + total equity.

Apple Investor Relations. " Condensed Consolidated Balance Sheets (Unaudited), FY 2020 Q4 ." Page 2.

PwC. " US Financial Statement Presentation Guide: 1.1 Financial Statement Presentation and Disclosure Requirements ."

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4 Key Financial Statements For Your Startup Business Plan

• September 12, 2022
• Fundraising

If you’re preparing a business plan for your startup, chances are that investors (or a bank) have also asked you to produce financial projections for your business. That’s absolutely normal: any startup business plan should at least include forecasts of the 3 financial statements.

The financial projections need to be presented clearly with charts and tables so potential investors understand where you are going, and how much money you need to get there .

In this article we explain you what are the 4 financial statements you should include in the business plan for your startup. Let’s dive in!

Financial Statement #1: Profit & Loss

The profit and loss (P&L) , also referred to as “income statement”, is a summary of all your revenues and expenses over a given time period .

By subtracting expenses from revenues, it gives a clear picture of whether your business is profitable, or loss-making. With the balance sheet and the cash flow statement, it is one of the 3 consolidated financial statements every startup must produce every fiscal year .

Most small businesses produce a P&L on a yearly basis with the help of their accountant. Yet it is good practice to keep track of all revenues and expenses on a monthly or quarterly basis as part of your budget instead.

When projecting your financials as part of your business plan, you must do so on a monthly basis. Usually, most startups project 3 years hence 36 months. If you have some historical performance (for instance you started your business 2 years ago), project 5 years instead.

Expert-built financial model templates for tech startups

Financial Statement #2: Cash Flow

Whilst your P&L includes all your business’ revenues and expenses in a given period, the cash flow statement records all cash inflows and outflows over that same period.

Some expenses are not necessarily recorded in your P&L but should be included in your cash flow statement instead. Why is that? There are 2 main reasons:

• Your P&L shows a picture of all the revenues you generated over a given period as well as the expenses you incurred to generate these revenues . If you sell $100 worth of products in July 2021 and incurred $50 cost to source them from your supplier, your P&L shows $100 revenues minus $50 expenses for that month. But what about if you bought a $15,000 car to deliver these products to your customers? The $15,000 should not be recorded as an expense in your P&L, but a cash outflow instead. Indeed, the car will help you generate revenues, say over the next 5 years, not just in July 2021
• Some expenses in your P&L are not necessarily cash outflows. Think depreciation and amortization expenses for instance: they are pure artificial expenses and aren’t really “spent”. As such, whilst your P&L might include a $100 depreciation expense, your cash flow remains the same.

Financial Statement #3: Balance Sheet

Whilst the P&L and cash flow statement are a summary of your financial performance over a given time period, the balance sheet is a picture of your financials at a given time.

The balance sheet lists all your business’ assets and liabilities at a given time (at end of year for instance). As such, it includes things such as:

• Assets: patents, buildings, equipments, customer receivables, tax credits etc. Assets can be either tangible (e.g. buildings) or intangible (e.g. customer receivables ).
• Liabilities: debt, suppliers payables, etc.
• Equity : the paid-in capital invested to date in the company (from you and any other potential investors). Equity also includes the cumulative result of your P&L: the sum of your profits and losses to date

Whilst P&L and cash flow statement are fairly simple to build when preparing your business plan, you might need help for your balance sheet.

Financial Statement #4: Use of Funds

The use of funds is not a mandatory financial statement your accountant will need to prepare every year. Instead, you shall include it in your startup business plan, along with the 3 key financial statements.

Indeed, the use of funds tells investors where you will spend your money over a given time frame. For instance, if you are raising $500k to open a retail shop, you might need $250k for the first year lease and another $250k for the inventory.

Use of funds should not be an invention from you: instead it is the direct result of your cash flow statement . If you are raising for your first year of business, and your projected cash flow statement result in a $500k loss (including all revenues and expenses), you will need to raise $500k.

For instance, using the example above, if you need $500k over the next 12 months, raise $600k or so instead. Indeed, better be on the safe side in case things do not go as expected!

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How to Write the Financial Section of a Business Plan

An outline of your company's growth strategy is essential to a business plan, but it just isn't complete without the numbers to back it up. here's some advice on how to include things like a sales forecast, expense budget, and cash-flow statement..

A business plan is all conceptual until you start filling in the numbers and terms. The sections about your marketing plan and strategy are interesting to read, but they don't mean a thing if you can't justify your business with good figures on the bottom line. You do this in a distinct section of your business plan for financial forecasts and statements. The financial section of a business plan is one of the most essential components of the plan, as you will need it if you have any hope of winning over investors or obtaining a bank loan. Even if you don't need financing, you should compile a financial forecast in order to simply be successful in steering your business. "This is what will tell you whether the business will be viable or whether you are wasting your time and/or money," says Linda Pinson, author of Automate Your Business Plan for Windows  (Out of Your Mind 2008) and Anatomy of a Business Plan (Out of Your Mind 2008), who runs a publishing and software business Out of Your Mind and Into the Marketplace . "In many instances, it will tell you that you should not be going into this business." The following will cover what the financial section of a business plan is, what it should include, and how you should use it to not only win financing but to better manage your business.

Dig Deeper: Generating an Accurate Sales Forecast

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How to Write the Financial Section of a Business Plan: The Purpose of the Financial Section Let's start by explaining what the financial section of a business plan is not. Realize that the financial section is not the same as accounting. Many people get confused about this because the financial projections that you include--profit and loss, balance sheet, and cash flow--look similar to accounting statements your business generates. But accounting looks back in time, starting today and taking a historical view. Business planning or forecasting is a forward-looking view, starting today and going into the future. "You don't do financials in a business plan the same way you calculate the details in your accounting reports," says Tim Berry, president and founder of Palo Alto Software, who blogs at Bplans.com and is writing a book, The Plan-As-You-Go Business Plan. "It's not tax reporting. It's an elaborate educated guess." What this means, says Berry, is that you summarize and aggregate more than you might with accounting, which deals more in detail. "You don't have to imagine all future asset purchases with hypothetical dates and hypothetical depreciation schedules to estimate future depreciation," he says. "You can just guess based on past results. And you don't spend a lot of time on minute details in a financial forecast that depends on an educated guess for sales." The purpose of the financial section of a business plan is two-fold. You're going to need it if you are seeking investment from venture capitalists, angel investors, or even smart family members. They are going to want to see numbers that say your business will grow--and quickly--and that there is an exit strategy for them on the horizon, during which they can make a profit. Any bank or lender will also ask to see these numbers as well to make sure you can repay your loan. But the most important reason to compile this financial forecast is for your own benefit, so you understand how you project your business will do. "This is an ongoing, living document. It should be a guide to running your business," Pinson says. "And at any particular time you feel you need funding or financing, then you are prepared to go with your documents." If there is a rule of thumb when filling in the numbers in the financial section of your business plan, it's this: Be realistic. "There is a tremendous problem with the hockey-stick forecast" that projects growth as steady until it shoots up like the end of a hockey stick, Berry says. "They really aren't credible." Berry, who acts as an angel investor with the Willamette Angel Conference, says that while a startling growth trajectory is something that would-be investors would love to see, it's most often not a believable growth forecast. "Everyone wants to get involved in the next Google or Twitter, but every plan seems to have this hockey stick forecast," he says. "Sales are going along flat, but six months from now there is a huge turn and everything gets amazing, assuming they get the investors' money."  The way you come up a credible financial section for your business plan is to demonstrate that it's realistic. One way, Berry says, is to break the figures into components, by sales channel or target market segment, and provide realistic estimates for sales and revenue. "It's not exactly data, because you're still guessing the future. But if you break the guess into component guesses and look at each one individually, it somehow feels better," Berry says. "Nobody wins by overly optimistic or overly pessimistic forecasts."

Dig Deeper: What Angel Investors Look For

How to Write the Financial Section of a Business Plan: The Components of a Financial Section

A financial forecast isn't necessarily compiled in sequence. And you most likely won't present it in the final document in the same sequence you compile the figures and documents. Berry says that it's typical to start in one place and jump back and forth. For example, what you see in the cash-flow plan might mean going back to change estimates for sales and expenses.  Still, he says that it's easier to explain in sequence, as long as you understand that you don't start at step one and go to step six without looking back--a lot--in between.

• Start with a sales forecast. Set up a spreadsheet projecting your sales over the course of three years. Set up different sections for different lines of sales and columns for every month for the first year and either on a monthly or quarterly basis for the second and third years. "Ideally you want to project in spreadsheet blocks that include one block for unit sales, one block for pricing, a third block that multiplies units times price to calculate sales, a fourth block that has unit costs, and a fifth that multiplies units times unit cost to calculate cost of sales (also called COGS or direct costs)," Berry says. "Why do you want cost of sales in a sales forecast? Because you want to calculate gross margin. Gross margin is sales less cost of sales, and it's a useful number for comparing with different standard industry ratios." If it's a new product or a new line of business, you have to make an educated guess. The best way to do that, Berry says, is to look at past results.
• Create an expenses budget. You're going to need to understand how much it's going to cost you to actually make the sales you have forecast. Berry likes to differentiate between fixed costs (i.e., rent and payroll) and variable costs (i.e., most advertising and promotional expenses), because it's a good thing for a business to know. "Lower fixed costs mean less risk, which might be theoretical in business schools but are very concrete when you have rent and payroll checks to sign," Berry says. "Most of your variable costs are in those direct costs that belong in your sales forecast, but there are also some variable expenses, like ads and rebates and such." Once again, this is a forecast, not accounting, and you're going to have to estimate things like interest and taxes. Berry recommends you go with simple math. He says multiply estimated profits times your best-guess tax percentage rate to estimate taxes. And then multiply your estimated debts balance times an estimated interest rate to estimate interest.
• Develop a cash-flow statement. This is the statement that shows physical dollars moving in and out of the business. "Cash flow is king," Pinson says. You base this partly on your sales forecasts, balance sheet items, and other assumptions. If you are operating an existing business, you should have historical documents, such as profit and loss statements and balance sheets from years past to base these forecasts on. If you are starting a new business and do not have these historical financial statements, you start by projecting a cash-flow statement broken down into 12 months. Pinson says that it's important to understand when compiling this cash-flow projection that you need to choose a realistic ratio for how many of your invoices will be paid in cash, 30 days, 60 days, 90 days and so on. You don't want to be surprised that you only collect 80 percent of your invoices in the first 30 days when you are counting on 100 percent to pay your expenses, she says. Some business planning software programs will have these formulas built in to help you make these projections.
• Income projections. This is your pro forma profit and loss statement, detailing forecasts for your business for the coming three years. Use the numbers that you put in your sales forecast, expense projections, and cash flow statement. "Sales, lest cost of sales, is gross margin," Berry says. "Gross margin, less expenses, interest, and taxes, is net profit."
• Deal with assets and liabilities. You also need a projected balance sheet. You have to deal with assets and liabilities that aren't in the profits and loss statement and project the net worth of your business at the end of the fiscal year. Some of those are obvious and affect you at only the beginning, like startup assets. A lot are not obvious. "Interest is in the profit and loss, but repayment of principle isn't," Berry says. "Taking out a loan, giving out a loan, and inventory show up only in assets--until you pay for them." So the way to compile this is to start with assets, and estimate what you'll have on hand, month by month for cash, accounts receivable (money owed to you), inventory if you have it, and substantial assets like land, buildings, and equipment. Then figure out what you have as liabilities--meaning debts. That's money you owe because you haven't paid bills (which is called accounts payable) and the debts you have because of outstanding loans.
• Breakeven analysis. The breakeven point, Pinson says, is when your business's expenses match your sales or service volume. The three-year income projection will enable you to undertake this analysis. "If your business is viable, at a certain period of time your overall revenue will exceed your overall expenses, including interest." This is an important analysis for potential investors, who want to know that they are investing in a fast-growing business with an exit strategy.

Dig Deeper: How to Price Business Services

How to Write the Financial Section of a Business Plan: How to Use the Financial Section One of the biggest mistakes business people make is to look at their business plan, and particularly the financial section, only once a year. "I like to quote former President Dwight D. Eisenhower," says Berry. "'The plan is useless, but planning is essential.' What people do wrong is focus on the plan, and once the plan is done, it's forgotten. It's really a shame, because they could have used it as a tool for managing the company." In fact, Berry recommends that business executives sit down with the business plan once a month and fill in the actual numbers in the profit and loss statement and compare those numbers with projections. And then use those comparisons to revise projections in the future. Pinson also recommends that you undertake a financial statement analysis to develop a study of relationships and compare items in your financial statements, compare financial statements over time, and even compare your statements to those of other businesses. Part of this is a ratio analysis. She recommends you do some homework and find out some of the prevailing ratios used in your industry for liquidity analysis, profitability analysis, and debt and compare those standard ratios with your own. "This is all for your benefit," she says. "That's what financial statements are for. You should be utilizing your financial statements to measure your business against what you did in prior years or to measure your business against another business like yours."  If you are using your business plan to attract investment or get a loan, you may also include a business financial history as part of the financial section. This is a summary of your business from its start to the present. Sometimes a bank might have a section like this on a loan application. If you are seeking a loan, you may need to add supplementary documents to the financial section, such as the owner's financial statements, listing assets and liabilities. All of the various calculations you need to assemble the financial section of a business plan are a good reason to look for business planning software, so you can have this on your computer and make sure you get this right. Software programs also let you use some of your projections in the financial section to create pie charts or bar graphs that you can use elsewhere in your business plan to highlight your financials, your sales history, or your projected income over three years. "It's a pretty well-known fact that if you are going to seek equity investment from venture capitalists or angel investors," Pinson says, "they do like visuals."

Dig Deeper: How to Protect Your Margins in a Downturn

Related Links: Making It All Add Up: The Financial Section of a Business Plan One of the major benefits of creating a business plan is that it forces entrepreneurs to confront their company's finances squarely. Persuasive Projections You can avoid some of the most common mistakes by following this list of dos and don'ts. Making Your Financials Add Up No business plan is complete until it contains a set of financial projections that are not only inspiring but also logical and defensible. How many years should my financial projections cover for a new business? Some guidelines on what to include. Recommended Resources: Bplans.com More than 100 free sample business plans, plus articles, tips, and tools for developing your plan. Planning, Startups, Stories: Basic Business Numbers An online video in author Tim Berry's blog, outlining what you really need to know about basic business numbers. Out of Your Mind and Into the Marketplace Linda Pinson's business selling books and software for business planning. Palo Alto Software Business-planning tools and information from the maker of the Business Plan Pro software. U.S. Small Business Administration Government-sponsored website aiding small and midsize businesses. Financial Statement Section of a Business Plan for Start-Ups A guide to writing the financial section of a business plan developed by SCORE of northeastern Massachusetts.

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What Is a Balance Sheet, and How Do You Read It?

Posted january 31, 2019 by noah parsons.

Every business plan should include three key financial statements: a profit and loss statement, a cash flow statement, and a balance sheet.

The balance sheet is the statement that is most often misunderstood, which is problematic because it is also the most useful of the three statements. If you’re building or running a business, you’ll need to know how to read and understand your balance sheet.

What is a balance sheet?

Your balance sheet is a financial statement that summarizes your company’s assets (what you own), your liabilities (what you owe), and equity (money invested into the business, plus profits).

The balance sheet doesn’t show trends, but instead shows the financial state of a company at a specific point in time.

The balance sheet always follows this formula:

Assets = Liabilities + Equity

Reading and understanding your balance sheet

Balance sheets get their name from the fact that they always have to balance out, based on the formula above.

Assets must always equal liabilities plus equity. This might sound complicated at first, but it’s actually pretty straightforward: A company needs to pay for the things it owns (assets) by either borrowing money (liabilities) or getting money from investors and profits (equity).

Let’s look at an example so you can see how this works. If your business gets a $10,000 loan from the bank, you now have $10,000 in cash in your business bank account. This is your asset.

But, you also now owe the bank $10,000 which is your liability. The two sides of the equation balance out because the money you owe equals the amount of money that you have added to your bank account.

$10,000 cash (asset) = $10,000 loan (liability)

If you also get a $5,000 investment, your assets will increase as you add that cash to your bank account, but equity will also increase because investors now own a piece of the company.

$15,000 cash (asset) = $10,000 loan (liability) + $5,000 investment (equity)

Equity will also include all revenues the company generates in excess of its liabilities. These revenues will also show up on the assets side, appearing as cash, investments, inventory, or some other asset.

The three categories here (assets, liabilities, and equity) are each made up of various sub-accounts. Depending on your industry, there can be different accounts in each section. Below, we’ll define some of the most common things you’ll see in each section.

What’s included in assets?

Assets are divided into two primary groups: current assets and long-term assets .

Current assets can be converted into cash in a year or less. They typically include cash, stocks, accounts receivable , prepaid expenses, and inventory.

Fixed assets are tangible assets that are for long-term use, such as equipment, machinery, vehicles, land and buildings, furniture and fixtures, and leasehold improvements.

What’s included in liabilities?

Liabilities are the money that a business owes to other people or businesses. These could be bills, loans, deferred taxes, and so on. Just like assets, liabilities are divided into current and long-term groups.

Current liabilities are business obligations due within one year. These typically include short-term loans (including lines of credit), current maturities of long-term debt, accounts payable , accrued payroll and other expenses, and taxes payable.

Long-term liabilities are business obligations that are due outside of one year, such as any bank debt or shareholder loans with maturities longer than one year.

What’s included in equity?

The  equity section of the balance sheet is the sum of all shareholder/owner money invested in the business plus accumulated business profits.

Example of a balance sheet

What does a balance sheet typically look like? Check out this example from LivePlan.

How to use the balance sheet

Find your net worth. Your balance sheet can provide a wealth of useful information to help improve your financial management. For example, you can determine your company’s net worth by subtracting your balance sheet liabilities from your assets.

Spot potential cash issues . Perhaps the most useful aspect of your balance sheet is its ability to alert you to potential cash shortages. You can look at the amount of cash you have in the bank and quickly see how much you owe your vendors (accounts payable). If your accounts payable number is greater than the amount of cash you have on hand, you’ll need to have a plan for either increasing the amount of cash you have or paying your bills more slowly over time.

There are two easy-to-figure-out ratios that can be computed from the balance sheet to help determine whether your company will have sufficient cash to meet current financial obligations:

Current ratio

The current ratio measures liquidity to show whether your company has enough current (i.e., liquid) assets on hand to pay bills on-time and run operations effectively. It is expressed as the number of times current assets exceed current liabilities.

The higher the current ratio, the better. A current ratio of 2:1 is generally considered acceptable for inventory-carrying businesses, although industry standards can vary widely. The acceptable current ratio for a retail business, for example, is different from that of a manufacturer.

Current Assets / Current Liabilities

Quick ratio

Quick ratio is similar to the current ratio but excludes inventory. A quick ratio of 1.5:1 is generally desirable for non-inventory-carrying businesses, but—just as with current ratios—desirable quick ratios differ from industry to industry.

Current Assets – Inventory / Current Liabilities

You can use industry benchmark tools, such as the ones found in LivePlan, to determine if your balance sheet ratios are in-line with your industry averages.

When you’re creating a forecast for your business, it’s generally much easier to use a tool like LivePlan to create your balance sheet for you; You can also download our free Balance Sheet Template and build one on your own.

If you have any questions, please feel free to reach me on Twitter @noahparsons.

For more business concepts made simple, check out these articles on direct costs , cash burn rate , net profit , operating margin , accounts payable , accounts receivable , cash flow , profit and loss statement , and expense budgeting .

Editor’s note: This article originally published in 2016. It was updated in 2019. 

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Free Small Business Balance Sheet Templates

By Andy Marker | March 9, 2022 (updated April 28, 2023)

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We’ve compiled a collection of the most helpful free small business balance sheet templates for small business owners, accountants, and other stakeholders. 

Included on this page, you’ll find a simple small business balance sheet template , a small business pro forma balance sheet template , a monthly/quarterly small business balance sheet template , and more. Plus, find helpful tips for using a small business balance sheet template .

Simple Small Business Balance Sheet Template

Download a Simple Small Business Balance Sheet Template for  Microsoft Word | Excel | Adobe PDF | Google Sheets

Use this simple, printable small business balance sheet template to calculate your small business’s year-to-year total assets, total liabilities, balance, and net worth. Enter your current and fixed assets, your current and long-term liabilities, and your owner’s equity. Your total assets and total liabilities are reflected in the Balance field . Complete the template monthly or yearly to create organized historical data for referencing changes in financial outlooks. This balance sheet template is useful for any industry, from marketing to real estate to IT. 

Check out this collection of business plan financial templates to create an accurate financial picture of your company .

Small Business Balance Sheet Template

Download a Small Business Balance Sheet Template with Sample Data for  Excel | Adobe PDF | Google Sheets

Download a Blank Small Business Balance Sheet Template for  Excel | Adobe PDF | Google Sheets

Use this printable year-over-year small business balance sheet template to record your current financial status, or fill in projections to predict potential financial outcomes. Enter your assets, liabilities, and owner’s equity to determine common financial ratios. Use this tool to track and anticipate your small business’s finances. You can download two versions of this template: a blank balance sheet, or a sample balance sheet template with example text to guide you through the process. 

Try one of these free profit-and-loss template resources to ensure that you can accurately account for your balance sheet needs.

Monthly/Quarterly Small Business Balance Sheet Template

Download a Monthly/Quarterly Small Business Balance Sheet Template for  Excel | Google Sheets

Use this monthly or quarterly small business balance sheet template to analyze and archive your business’s assets, liabilities, and equities over monthly, quarterly, and year-to-date timelines. The spreadsheet will automatically calculate short term and long-term assets and liabilities every quarter and at the end of each year. Common financial ratios are calculated using total and current liabilities and equity. This printable template is the perfect tool for analyzing your business’s economic health.

Small Business Cash Accounting Balance Sheet Template

Download a Small Business Cash Accounting Balance Sheet Template for  Excel | Google Sheets

Use this small business cash accounting balance sheet template to determine your business’s outgoing cash. This printable template includes total calculations of cash receipts, costs of goods sold, operating expenses, and additional expenses. Choose your start and end dates to create a customizable timeline. 

Check out these small business expense report templates to ensure that you capture company and employee expenses accurately.

Small Business Pro Forma Balance Sheet Template

Download a Small Business Pro Forma Balance Sheet Template for  Excel | Google Sheets

This printable small business pro forma balance sheet template serves as your business's financial statement over the course of a specific timeframe. Enter line items to quickly calculate your current and long-term assets, current and long-term liabilities, and owner’s equity. Annual columns make it easy to compare changes year over year. Once completed, you can identify where to make adjustments to improve profit and net worth.

What Is a Small Business Balance Sheet Template?

A small business balance sheet template is a statement of assets, liabilities, and equity. Monthly, quarterly, and annual balance sheets provide insight into gradual financial changes. Balance sheet templates are essential to maintaining financial statements and measuring financial health. 

If you are a current or prospective small business owner, it’s imperative that you track your liabilities and assets. Doing so will ensure you have accurate information regarding how your company invests and spends money. A complete balance sheet allows you to identify areas of concern and patterns in profit and loss.  

A small business balance sheet template typically includes the following line items for tracking your business's financial position: 

• Current Assets: List things your small business currently owns, such as cash, inventory, short-term investments, prepaid expenses, and accounts receivable.  
• Fixed (Long-Term) Assets: Write down any assets, such as patents, vehicles, and equipment that benefit the company for longer than one year.
• Current Liabilities: This category includes anything your small business pays out routinely, such as rent, wages, administrative costs, supplies, and accounts payable.
• Long-Term Liabilities: List any company debt, such as long-term loans. 
• Owner’s Equity: Once your liabilities are paid, this is what your business is worth. 
• Current Ratio: This number is determined by comparing your current assets to your current liabilities. 
• Debt Ratio: A company’s debt ratio is the percentage of assets that have been financed through debt. To calculate your debt ratio, divide your total liabilities by your total assets.
• Working Capital: Working capital is a measure of how much money a business has on hand to cover its everyday expenses. To calculate your working capital, subtract your current liabilities from your current assets.
• Assets-to-Equity Ratio: Assets-to-equity ratio is the percentage of a company's assets that belong to the owners, compared to the company’s total assets. To calculate your assets-to-equity ratio, divide your total assets by the owner’s equity.
• Debt-to-Equity Ratio: Debt-to-equity ratio is the percentage of a company's assets that were paid for by borrowing money versus how much was paid for by the owners. To calculate your debt-to-equity ratio, divide your total liabilities by the owner’s equity. 
• Common Financial Ratios: These are various ratios a company uses when comparing assets, liabilities and owner’s equity.

Keep Track of Small Business Balance Sheets with Smartsheet

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Start » startup, business plan financials: 3 statements to include.

The finance section of your business plan is essential to securing investors and determining whether your idea is even viable. Here's what to include.

If your business plan is the blueprint of how to run your company, the financials section is the key to making it happen. The finance section of your business plan is essential to determining whether your idea is even viable in the long term. It’s also necessary to convince investors of this viability and subsequently secure the type and amount of funding you need. Here’s what to include in your business plan financials.

[Read: How to Write a One-Page Business Plan ]

What are business plan financials?

Business plan financials is the section of your business plan that outlines your past, current and projected financial state. This section includes all the numbers and hard data you’ll need to plan for your business’s future, and to make your case to potential investors. You will need to include supporting financial documents and any funding requests in this part of your business plan.

Business plan financials are vital because they allow you to budget for existing or future expenses, as well as forecast your business’s future finances. A strongly written finance section also helps you obtain necessary funding from investors, allowing you to grow your business.

Sections to include in your business plan financials

Here are the three statements to include in the finance section of your business plan:

Profit and loss statement

A profit and loss statement , also known as an income statement, identifies your business’s revenue (profit) and expenses (loss). This document describes your company’s overall financial health in a given time period. While profit and loss statements are typically prepared quarterly, you will need to do so at least annually before filing your business tax return with the IRS.

Common items to include on a profit and loss statement :

• Revenue: total sales and refunds, including any money gained from selling property or equipment.
• Expenditures: total expenses.
• Cost of goods sold (COGS): the cost of making products, including materials and time.
• Gross margin: revenue minus COGS.
• Operational expenditures (OPEX): the cost of running your business, including paying employees, rent, equipment and travel expenses.
• Depreciation: any loss of value over time, such as with equipment.
• Earnings before tax (EBT): revenue minus COGS, OPEX, interest, loan payments and depreciation.
• Profit: revenue minus all of your expenses.

Businesses that have not yet started should provide projected income statements in their financials section. Currently operational businesses should include past and present income statements, in addition to any future projections.

[Read: Top Small Business Planning Strategies ]

A strongly written finance section also helps you obtain necessary funding from investors, allowing you to grow your business.

Balance sheet

A balance sheet provides a snapshot of your company’s finances, allowing you to keep track of earnings and expenses. It includes what your business owns (assets) versus what it owes (liabilities), as well as how much your business is currently worth (equity).

On the assets side of your balance sheet, you will have three subsections: current assets, fixed assets and other assets. Current assets include cash or its equivalent value, while fixed assets refer to long-term investments like equipment or buildings. Any assets that do not fall within these categories, such as patents and copyrights, can be classified as other assets.

On the liabilities side of your balance sheet, include a total of what your business owes. These can be broken down into two parts: current liabilities (amounts to be paid within a year) and long-term liabilities (amounts due for longer than a year, including mortgages and employee benefits).

Once you’ve calculated your assets and liabilities, you can determine your business’s net worth, also known as equity. This can be calculated by subtracting what you owe from what you own, or assets minus liabilities.

Cash flow statement

A cash flow statement shows the exact amount of money coming into your business (inflow) and going out of it (outflow). Each cost incurred or amount earned should be documented on its own line, and categorized into one of the following three categories: operating activities, investment activities and financing activities. These three categories can all have inflow and outflow activities.

Operating activities involve any ongoing expenses necessary for day-to-day operations; these are likely to make up the majority of your cash flow statement. Investment activities, on the other hand, cover any long-term payments that are needed to start and run your business. Finally, financing activities include the money you’ve used to fund your business venture, including transactions with creditors or funders.

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Balance Sheets 101: What Goes On a Balance Sheet?

• 09 Jun 2016

A balance sheet is one of the primary statements used to determine the net worth of a company and get a quick overview of its financial health. The ability to read and understand a balance sheet is a crucial skill for anyone involved in business, but it’s one that many people lack.

What Is a Balance Sheet?

A balance sheet provides a snapshot of a company’s financial performance at a given point in time. This financial statement is used both internally and externally to determine the so-called “book value” of the company, or its overall worth.

Balance sheets are typically prepared and distributed monthly or quarterly depending on the governing laws and company policies. Additionally, the balance sheet may be prepared according to GAAP or IFRS standards based on the region in which the company is located.

The balance sheet is just a more detailed version of the fundamental accounting equation—also known as the balance sheet formula—which includes assets , liabilities , and shareholders’ equity .

The Balance Sheet Equation

Balance sheets are typically organized according to the following formula:

Assets = Liabilities + Owners’ Equity

The formula can also be rearranged like so:

Owners’ Equity = Assets - Liabilities or Liabilities = Assets - Owners’ Equity

A balance sheet must always balance; therefore, this equation should always be true.

You’ve probably heard at least some of these terms before. But what do they actually mean and include? Let’s break it down. Below, we’ll explore what exactly goes on a balance sheet.

What Goes on a Balance Sheet?

The assets are the operational side of the company. Basically, a list of what the company owns . Everything listed is an item that the company has control over and can use to run the business.

The left side of the balance sheet is the business itself, including the buildings, inventory for sale, and cash from selling goods. If you were to take a clipboard and record everything you found in a company, you would end up with a list that looks remarkably like the left side of the balance sheet. The assets are what allow the company to run.

Assets can be further categorized as either current assets or fixed (non-current) assets. Some of the most common current assets include:

• Cash and cash equivalents
• Accounts receivable
• Short-term marketable securities

Common fixed or non-current assets include:

• Property and equipment
• Long-term marketable securities
• Intangible assets such as patents, licenses, and goodwill

Assets will typically be presented as individual line items, such as the examples above. Then, current and fixed assets are subtotaled and finally totaled together.

2. Liabilities

Liabilities and equity make up the right side of the balance sheet and cover the financial side of the company. This is a list of what the company owes. With liabilities, this is obvious—you owe loans to a bank, or repayment of bonds to holders of debt. The interest rates are fixed and the amounts owed are clear. Liabilities are listed at the top of the balance sheet because, in case of bankruptcy, they are paid back first before any other funds are given out.

Similar to assets, liabilities are categorized as current and non-current liabilities. Common current liabilities include:

• Accounts payable
• Salaries and wages payable
• Deferred revenue
• Commercial paper
• Accrued expenses
• Short-term debt

Non-current liabilities include:

• Long-term debt
• Long-term lease obligations

Liabilities are presented as line items, subtotaled, and totaled on the balance sheet.

Below liabilities on the balance sheet is equity, or the amount owed to the owners of the company. Since they own the company, this amount is intuitively based on the accounting equation—whatever assets are left over after the liabilities have been accounted for must be owned by the owners, by equity. These are listed at the bottom of the balance sheet because the owners are paid back after all liabilities have been paid.

Unlike liabilities, equity is not a fixed amount with a fixed interest rate. Any time the value of assets change—perhaps you receive more in cash from a sale than the value of the inventory you sold, or you were forced to write down a truck that was involved in a collision and no longer works—the value of equity changes.

Because the value of liabilities is constant, all changes to assets must be reflected with a change in equity. This is also why all revenue and expense accounts are equity accounts, because they represent changes to the value of assets.

Common line items in the equity section of the balance sheet include:

• Common stock
• Preferred stock
• Treasury stock
• Retained earnings

Together, these line items make up total shareholders’ equity.

To recap, you’ll find the assets (what’s owned) on the left of the balance sheet, liabilities (what’s owed) and equity (the owners’ share) on the right, and the two sides remain balanced by adjusting the value of equity.

The Language of Business

It’s commonly held that accounting is the language of business. Understanding and analyzing key financial statements like the balance sheet , income statement, and cash flow statement is critical to painting a clear picture of a business’s past, present, and future performance. Knowing what goes into preparing these documents can also be insightful.

On a more granular level, the fundamentals of financial accounting can shed light on the performance of individual departments, teams, and projects. Whether you’re looking to understand your company’s balance sheet or create one yourself, the information you’ll glean from doing so can help you make better business decisions in the long run.

Want to learn more about what’s behind the numbers on financial statements? Explore our eight-week online course Financial Accounting —one of our online finance and accounting courses —to learn the key financial concepts you need to understand business performance and potential.

(This post was updated on January 31, 2023. It was originally published on June 9, 2016.)

About the Author

Startup Balance Sheet: Template + Guide

March 16, 2022

Adam Hoeksema

Every startup owner needs to be well aware of how their business is doing. A great way to get this perspective is by preparing and understanding crucial financial statements. Among these documents is the startup balance sheet, a document that gives a snapshot of the firm's current financial position. Although it can be challenging to prepare, it is helpful to startups due to its conciseness and accuracy. This article will discuss what a startup balance sheet is and show you how to prepare one. 

What is a Startup Balance Sheet?

A startup balance sheet or projected balance sheet is a financial statement highlighting a business startup's assets, liabilities, and owners' equity. In other words, a balance sheet shows what a business owns, the amount that it owes, and the amount that the business owner may claim. A balance sheet operates on the principle that the sum of liabilities and owners' equity equals its assets. If a business is a true startup with no historical data or assets to the business yet, you can create what is called a projected balance sheet as well.

Most other startup financial statements are prepared for a given fiscal period, such as a year or a quarter. A balance sheet precisely represents the startup's financial position at a point in time. Its contents depend on when it's prepared and reflect every financial decision made up to that point. 

Balance sheets are important financial documents, not only because they give a bird's-eye view of the entire finances. They also give investors a good idea of how the business is doing and the assets into which cash is poured. This makes the balance sheet crucial for securing investments and loans from investment firms, private investors, and banks.

Why You Need a Balance Sheet

Balance sheets are crucial financial statements for every business, including startups. There are several reasons why your startup will need a balance sheet. Some of them are:

• It gives a snapshot of the business

As Inc. Magazine showed, most owners of failed businesses do not realize that the business is failing until it is too late. This occurs because they fail to regularly check the business's accounts and balance sheets. As a result, they do not make important changes quickly enough. Checking your balance sheet regularly shows you how inflow is being managed to facilitate growth.

• It helps your startup secure loans and investments

Before a bank or any other financial institution offers loans to a business, they must ensure that their financial documents and projections are up-to-date and of a required standard. Additionally, investors want to be confident in the business owners' ability to give them a profitable return. A balance sheet is one of the crucial documents that these institutions will examine to ensure that business owners are competent. 

• It reveals trends in the business

Since balance sheets compare the value of specific assets and liabilities over time, they can show recurring or progressing trends in the business. For example, if you're constantly overstocked or understocked, it'd appear in the size of your inventory. If you're taking more loans than you need, it'd also appear. This allows you to make changes and improve productivity. 

• It contributes to decision making

Business owners need to make sound decisions based on the company's financial position. A balance sheet is a crucial document that reveals this position. With a good knowledge of the business's financial position, leaders are better equipped to make positive decisions for the company.

What to Include in a Balance Sheet

The contents of a balance sheet vary widely but belong to one of three classes. This section describes the contents to include in your startup balance sheet:

Assets are items that a business owns and may use to generate profit through its business activities. The sources of these assets include liabilities, or borrowings, and equity, which is the amount that the business owner and investors put into the business. Assets can be divided into two categories – current assets and non-current (fixed) assets.

Current assets are items that the business can convert to cash in a short period, usually a year. Current assets include cash, short-term investments, accounts receivable, and inventories. Typically, they appear at the top of the list.

Fixed assets or non-current assets cannot be converted to cash within a single year. They are referred to as illiquid assets and have a longer lifespan when compared to current assets. Fixed assets include tangible assets such as land, buildings, stocks, machinery, bonds, and long-term investments. 

Fixed assets may also be intangible, such as patents, goodwill, copyrights, trademarks. A brand name is also another intangible asset that may be of great value. The value of fixed assets is subject to appreciation and depreciation. Typically, fixed assets appear at the bottom of the list of assets.

• Liabilities

Liabilities are items that the business owes to entities outside of the business. It is one of the sources of capital to run the business. It is, therefore, an essential component of the balance sheet. Liabilities such as accounts payable may also be described as financial obligations a company has to others. Often, they appear with the tag “payable.” Liabilities may also be classified into two groups: long-term and short-term liabilities.

Short-term liabilities, or current liabilities, are financial obligations that the business must pay in less than a year. These include outstanding bills, unpaid dues, and taxes payable. Unpaid salaries and wages may also be a form of short-term liability. Short-term liabilities appear at the top of the list in the balance sheet.

Long-term liabilities are financial obligations that the business is not due to pay until a period much greater than a year. These include bank debt, bondholder debt, and other loans that are not due until over a year. They generally appear at the bottom of the balance sheet.

Equity is the value of ownership in a business. It also represents the amount that business owners have invested into their business. Equity comprises both paid-in funds and retained earnings. There are two kinds of equity: shareholders' equity and owner's equity.

Owner's equity refers to the value of the investment that a sole proprietor puts into the business. If the company has some investors, the investors' stake in the company is known as shareholders' equity. Equity can be calculated as the total value of assets minus the company's liabilities. Its value gives the net worth of the business. According to Investopedia , it refers to the amount paid to all investors if the business were to be liquidated at a given point in time.

The balance sheet equation gives a critical relationship between the three main components of a balance sheet. It reads thus: Assets = Liabilities + Equity

Types of Balance Sheets

There are several types of balance sheet formats available. Although each format highlights different aspects of the balance sheet, the basic principle of assets, liabilities, and owner equity is applied. Here are a few types of balance sheets you can consider:

• Classified Balance Sheet

Like a typical balance sheet, a classified balance sheet contains all the assets and liabilities of the business. But the critical difference here is that the information on assets, liabilities, and equity are placed into categories. The classified balance sheet is one of the most used. It makes it easier to compare balance sheets over different periods, tracking the growth of the business. 

• Unclassified Balance Sheet

This type of balance sheet is more straightforward than the classified. It simply lists all the items rather than categorizing them. This format is helpful for businesses with only a few items on their list. Typically, you'd list the assets and liabilities from top to bottom in decreasing order of liquidity. 

Liquidity measures how easily the business can turn assets into cash. This means that cash assets and liabilities should appear at the top of the list, while buildings and other fixed assets should appear at the bottom. Unclassified balance sheets are more common in small businesses.

• Common Size Balance Sheet

A common size balance sheet contains all the information on assets, liabilities, and equity-like a classified balance sheet. However, it also includes a column that lists the same information but as a percentage of the total. This means that each asset is listed as a percentage of the total value of assets. Also, each liability is listed as a percentage of the total liabilities and equity.

A common-size balance sheet helps compare relative changes in the company's pool of assets, liabilities, and equity. For example, suppose you'd like to observe how cash varied with time or how inventory values have increased over the years. In that case, you can use a common-size balance sheet.

• Comparative Balance Sheet

The purpose of a comparative balance sheet is to compare the business’s financial position at different points. A comparative balance sheet lists the assets, liabilities, and equity of a business at different times, arranging them side by side. This arrangement makes it easy to observe changes over time.

• Vertical Balance Sheet

This is another simple and commonly used format. A vertical balance sheet lists all the assets, liabilities, and equity in a single column. In a vertical balance sheet, you list assets first, followed by liabilities, and finally, equity. Like an unclassified balance sheet, it's customary to arrange items in decreasing order of liquidity, with cash and other liquid items on the top.

Find the Industry you need a Projected Balance Sheet For:

How to Create a Balance Sheet For Your Startup

According to the balance sheet equation, a business's assets must equal the sum of its liabilities and equity, which are the sources of its possessions. Arranging the information for a balance sheet might seem difficult, especially for a startup. This guide will help you to overcome these difficulties to create a balance sheet:

• Seek the guidance of an accountant

Preparing your first balance sheet, known as an opening day balance sheet, can seem quite scary. If you have not prepared a balance sheet before, you may need the advice of an expert to get started. This helps you avoid mistakes such as unreported assets or undocumented liabilities, which may present an inaccurate picture of the business. 

Additionally, an expert accountant is in a great position to give you financial advice which can help grow the company. Nowadays, most startups even outsource their financials to accountants. You may not be able to afford this as a new startup. Still, with a few hundred dollars, you can gain enough from their expertise to boost the financial security of your business.

• Choose a date to prepare the balance sheet

Most businesses prefer to prepare a balance sheet at the end of a fiscal year or, in other cases, at the end of each quarter. For you, this date may be the end of a financial period, at the beginning of the month, or any other date relevant to your business. Most businesses may still be preparing the balance sheet a few weeks after the date has passed.

Choosing the date to prepare the balance sheet allows you to collect documents, receipts, and files relevant to that point in time. This date should appear at the top of the balance sheet, typically part of the title.

• Gather the necessary data

After choosing the date for preparing the balance sheet, you'll need to collect all the necessary data. Collect important receipts, sales invoices, and request relevant bank statements. Determine how many loans you've taken as a business and how much is due to you. Don't forget to estimate the value of intangible assets, such as patents and trademarks. Having the necessary data handy makes it easier to create a balance sheet.

• Follow a standard format

A balance sheet follows a standard format in which assets, liabilities, and equity occupy designated columns. Ensure that your balance sheet follows a standard format so that it can be easily interpreted by investors and other firms interested in your business. If you're not sure how to present your balance sheet, Projection Hub has several pre-saved templates that can save you work hours. Projection Hub has several custom templates for almost any kind of business.

Here is a sample balance sheet from a fictional startup as a guide:

• Prepare the assets section

Under the Assets section, create a subheading for current assets first. Under this subheading, list all your current assets such as cash, inventory, accounts payable, et cetera. Be sure to list the items from most liquid to least liquid. Add up the subtotal of current assets, and include it in your balance sheet as “Total Current Assets.”

Then, create a section for fixed assets. Here, you can include items like plants, equipment, and long-term investments. Don't forget to add the intangible assets as well. Find the subtotal of the fixed assets. Finally, include the total of all assets.

• Add the liabilities section

Under the Liabilities section, create a subheading for current liabilities. Under this subheading, list all repayments due within a year, such as short-term debts, salaries payable, and accounts payable within a year. Add up the subtotal and list it in your balance sheet.

Also, create a subheading for long-term liabilities. In this section, list all repayments due in more than a year, such as bank loans and mortgages. Include the subtotal in your balance sheet. Finally, add up the total value of the liabilities, and include this in the balance sheet.

• Include an equity section

Under this section, include the amount invested in the business by shareholders and the business owner. Be sure to add any retained earnings which went into the business. Add these up as the total equity.

• Ensure the accounting equation is balanced

Finally, add up the total assets and the total liabilities and equity. Compare the two values – they should tally. If they do, your balance sheet is complete. If they do not tally, you may need to visit your data to check for omitted or miscategorized figures. Ensure that these are taken care of, and work on the balance sheet again.

And if you’d like to use a tool to develop a 5 year projected balance sheet , you can use our financial projection templates here at ProjectionHub which will automatically generate your balance sheet with your information. We also have a completely free standalone Balance Sheet template you can download here!

A balance sheet is an essential financial statement that captures the strength of a business's financial position. Although preparing a balance sheet might seem difficult for a new startup, preparing one is well worth it. With a well-prepared balance sheet, you become informed enough to make excellent decisions that would move your company forward.

Not ready to make a full blown projected balance sheet yet? Check out our free balance sheet template:

About the Author

Adam is the Co-founder of ProjectionHub which helps entrepreneurs create financial projections for potential investors, lenders and internal business planning. Since 2012, over 40,000 entrepreneurs from around the world have used ProjectionHub to help create financial projections.

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What Is A Balance Sheet? (Example Included)

Updated: Jun 1, 2024, 2:22pm

Table of Contents

What is a balance sheet, components of a balance sheet, how to balance a balance sheet, why is a balance sheet important, balance sheet example, frequently asked questions (faqs).

When you’re starting a company, there are many important financial documents to know. It might seem overwhelming at first, but getting a handle on everything early will set you up for success in the future. Today, we’ll go over what a balance sheet is and how to master it to keep accurate financial records.

A balance sheet is a comprehensive financial statement that gives a snapshot of a company’s financial standing at a particular moment. A balance sheet covers a company’s assets as defined by its liabilities and shareholder equity.

Balance Sheet Time Periods

When investors ask for a balance sheet, they want to make sure it’s accurate to the current time period. They might want to see a past balance sheet as well. It’s important to keep accurate balance sheets regularly for this reason.

Assets are any resources your company owns that holds value. When setting up a balance sheet, you should order assets from current assets to long-term assets. Long-term assets can’t be converted immediately into cash on hand. They’re important to include, but they can’t immediately be converted into liquid capital.

There are a few different types of assets to list that your company probably has on-hand:

• Liquid assets: Cash and cash equivalents, such as certificates of deposit (CDs)
• Accounts receivable (A/R): Money owed to your company
• Marketable securities: Liquid assets that are readily convertible into cash (generally reported under cash and cash equivalents)
• Inventory: Any products you have available for sale
• Prepaid expenses: Rent, insurance and contracts with vendors

These are examples of long-term assets:

• Investments or securities that can’t be liquidated within the next year
• Fixed assets: Land, machinery and buildings
• Intangible assets: Intellectual property, brand awareness and company reputation

Want more information? Here’s everything you need to know about assets .

Liabilities

A liability is money that your company owes to any outside entity. Liabilities refer to basic aspects of your business: taking in money, loans, providing services and everything else your business does.

Liabilities are categorized as current and long-term as well. Current liabilities are customer prepayments for which your company needs to provide a service, wages, debt payments and more.

On the other hand, long-term liabilities are long-term debts like interest and bonds, pension funds and deferred tax liability.

Shareholder Equity

Finally, shareholder equity refers to your company’s net assets. The shareholder equity comprises the following:

• Money generated by a company
• Money put into the business by its owners and shareholders
• Any other capital put into the business

You can calculate total equity by subtracting liabilities from your company’s total assets.

When creating a balance sheet, start with two sections to make sure everything is matching up correctly. On one side, you’ll have the business’s assets. On the other side, you’ll put the company’s liabilities and shareholder equity.

The numbers should match up exactly: the total assets must be equal to the liabilities and shareholder assets. If these numbers aren’t the same, there might be an issue with your calculations or a missing asset or liability. Before sharing with any possible investors, make sure to check over your balance sheet several times.

Balance sheets are important because they give a picture of your company’s financial standing. Before getting a business loan or meeting with potential investors, a company has to provide an up-to-date balance sheet. A potential investor or loan provider wants to see that the company is able to keep payments on time.

Department heads can also use a balance sheet to understand the financial health of the company. Looking at the balance sheet and its components helps them keep track of important payments and how much cash is available on hand to pay these vendors.

Overall, a balance sheet is an important statement of your company’s financial health, and it’s important to have accurate balance sheets available regularly.

This is an example of a basic balance sheet and what’s included.

Download Balance Sheet Example

In this example, the imagined company had its total liabilities increase over the time period between the two balance sheets and consequently the total assets decreased.

Bottom Line

A balance sheet is a financial document that you should work on calculating regularly. If there are discrepancies, that means you’re missing important information for putting together the balance sheet.

Why do we need a balance sheet?

The balance sheet is a report that gives a basic snapshot of the company’s finances. This is an important document for potential investors and loan providers.

How do I calculate a balance sheet?

The formula is very basic: total assets = total liabilities + total equity. If you have questions about the individual components of the balance sheet, you might have to consult a finance expert.

What is the best accounting software for small businesses?

There are a number of high-quality accounting software solutions available. The overall best include OnPay, Gusto and QuickBooks. To find out which is the right option for your business, check out our article detailing the best accounting software for small businesses .

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Balance Sheet

Written by True Tamplin, BSc, CEPF®

Reviewed by subject matter experts.

Updated on March 17, 2023

Get Any Financial Question Answered

Table of contents, what is a balance sheet.

A balance sheet is a financial statement that shows the relationship between assets , liabilities , and shareholders’ equity of a company at a specific point in time.

Measuring a company’s net worth, a balance sheet shows what a company owns and how these assets are financed, either through debt or equity .

Balance sheets are useful tools for individual and institutional investors, as well as key stakeholders within an organization, as they show the general financial status of the company.

It is also possible to grasp the information found in a balance sheet to calculate important company metrics, such as profitability, liquidity, and debt-to-equity ratio.

However, it is crucial to remember that balance sheets communicate information as of a specific date. Naturally, a balance sheet is always based upon past data.

While stakeholders and investors may use a balance sheet to predict future performance, past performance does not guarantee future results.

In order to see the direction of a company, you will need to look at balance sheets over a time period of months or years.

How Balance Sheets Work

A balance sheet is guided by the accounting equation:

Both parts should be equal to each other or balance each other out. This means that the assets of a company should equal its liabilities plus any shareholders’ equity that has been issued. Hence, a balance sheet should always balance.

For instance, if a company takes out a ten-year, $8,000 loan from a bank, the assets of the company will increase by $8,000. Its liabilities will also increase by $8,000, balancing the two sides of the accounting equation .

If the company takes $10,000 from its investors, its assets and stockholders’ equity will also increase by that amount.

The revenues of the company in excess of its expenses will go into the shareholder equity account.

These revenues will be balanced on the asset side of the equation, appearing as inventory, cash , investments , or other assets.

Components of a Balance Sheet

A balance sheet has three primary components: assets, liabilities, and shareholders’ equity.

Assets are anything the company owns that holds some quantifiable value, which means that they could be liquidated and turned into cash.

These can include cash, investments, and tangible objects.

Companies divide their assets into two categories: current assets and noncurrent (long-term) assets.

Current Assets

Current assets are typically those that a company expects to convert easily into cash within a year.

These assets include cash and cash equivalents, prepaid expenses, accounts receivable, marketable securities, and inventory.

Non-Current Assets

Noncurrent assets are long-term investments that the company does not expect to convert into cash within a year or have a lifespan of more than one year.

Noncurrent assets include tangible assets , such as land, buildings, machinery, and equipment.

They can also be intangible assets, such as trademarks, patents, goodwill, copyright , or intellectual property.

Liabilities

Liabilities are anything a company owes. These are loans, accounts payable, bonds payable, or taxes.

Like assets, liabilities can be classified as either current or noncurrent liabilities.

Current Liabilities

Current liabilities refer to the liabilities of the company that are due or must be paid within one year.

This may include accounts payables, rent and utility payments, current debts or notes payables, current portion of long-term debt, and other accrued expenses.

Noncurrent Liabilities

Noncurrent or long-term liabilities are debts and other non-debt financial obligations that a company does not expect to repay within one year from the date of the balance sheet.

This may include long-term loans, bonds payable, leases, and deferred tax liabilities.

Shareholder’s Equity

Shareholder’s equity is the net worth of the company and reflects the amount of money left over if all liabilities are paid, and all assets are sold.

Shareholders’ equity belongs to the shareholders, whether public or private owners.

Retained Earnings

Shareholders’ equity reflects how much a company has left after paying its liabilities.

If the company wanted to, it could pay out all of that money to its shareholders through dividends . However, the company typically reinvests the money into the company.

Retained earnings are the money that the company keeps.

Share Capital

Share capital is the value of what investors have invested in the company.

For instance, if someone invests $200,000 to help you start a company, you would count that $200,000 in your balance sheet as your cash assets and as part of your share capital.

Stocks can be common or preferred stocks .

Common stock is those that people get when they buy stock through the stock market . Preferred stock, on the other hand, provides the shareholder with a greater claim on the company’s assets and earnings.

You can also see treasury stock on a balance sheet. This stock is a previously outstanding stock that is purchased from stockholders by the issuing company.

Example of a Balance Sheet

Below is an example of a balance sheet of Tesla for 2021 taken from the U.S. Securities and Exchange Commission .

As you can see, it starts with current assets, then the noncurrent, and the total of both.

Below the assets are the liabilities and stockholders’ equity, which include current liabilities, noncurrent liabilities, and shareholders’ equity.

For example, this balance sheet tells you:

• The reporting period ends December 31, 2021, and compares against a similar reporting period from the year prior.
• The assets of the company total $62,131, including $27,100 in current assets and $35,031 in noncurrent assets.
• The liabilities of the company total $30,548, including $19,705 in current liabilities and $10,843 in noncurrent liabilities.
• The company retained $331 in earnings during the reporting period, greatly less than the same period a year prior.
• Adhering to the accounting equation, a balance is obtained by the total assets of $62,131 and the combined total liabilities and stockholders’ equity which is $62,131.

It is crucial to note that how a balance sheet is formatted differs depending on where the company or organization is based.

How to Prepare a Balance Sheet

The balance sheet is prepared using the following steps:

Step 1: Determine the Reporting Date and Period

The balance sheet previews the total assets, liabilities, and shareholders’ equity of a company on a specific date, referred to as the reporting date.

Often, the reporting date will be the final day of the reporting period. Companies that report annually, like Tesla, often use December 31st as their reporting date, though they can choose any date.

There are also companies, like publicly traded ones, that will report quarterly. For this case, the reporting date will usually fall on the last day of the quarter:

• Q1: March 31
• Q2: June 30
• Q3: September 30
• Q4: December 31

However, it is common for a balance sheet to take a few days or weeks to prepare after the reporting period has ended.

Step 2: Identify Your Assets

You will need to tally up all your assets of the company on the balance sheet as of that date. This will include both current and noncurrent assets.

Assets are typically listed as individual line items and then as total assets in a balance sheet.

This will make it easier for analysts to comprehend exactly what your assets are and where they came from. Tallying the assets together will be required for final analysis.

Step 3: Identify Your Liabilities

Like assets, you need to identify your liabilities which will include both current and long-term liabilities.

Again, these should be organized into both line items and total liabilities. They should also be both subtotaled and then totaled together.

Step 4: Calculate Shareholders’ Equity

After you have assets and liabilities, calculating shareholders’ equity is done by taking the total value of assets and subtracting the total value of liabilities.

Shareholders’ equity will be straightforward for companies or organizations that a single owner privately holds.

The calculation may be complicated for publicly held companies depending on the various types of stock issued.

Line items in this section include common stocks, preferred stocks, share capital, treasury stocks, and retained earnings.

Step 5: Add Total Liabilities to Total Shareholders’ Equity and Compare to Assets

Adding total liabilities to shareholders’ equity should give you the same sum as your assets. If not, then there may be an error in your calculations.

Causes of a balance sheet not truly balancing may be:

• Errors in inventory
• Incorrectly entered transactions
• Incomplete or misplaced data
• Miscalculated loan amortization or depreciation
• Errors in currency exchange rates
• Miscalculated equity calculations

How to Analyze a Balance Sheet

Financial ratio analysis is the main technique to analyze the information contained within a balance sheet.

It uses formulas to obtain insights into a company and its operations.

Using financial ratios in analyzing a balance sheet, like the debt-to-equity ratio, can produce a good sense of the financial condition of the company and its operational efficiency.

It is crucial to remember that some ratios will require information from more than one financial statement, such as from the income statement and the balance sheet.

There are two types of ratios that use data from a balance sheet. These are:

Financial Strength Ratios

Financial strength ratios can provide investors with ideas of how financially stable the company is and whether it finances itself.

It also yields information on how well a company can meet its obligations and how these obligations are leveraged.

Financial strength ratios can include the working capital and debt-to-equity ratios.

Activity Ratios

Activity ratios mainly focus on current accounts to reveal how well the company manages its operating cycle .

These operating cycles can include receivables, payables, and inventory.

Examples of activity ratios are inventory turnover ratio, total assets turnover ratio, fixed assets turnover ratio, and accounts receivables turnover ratio.

These ratios can yield insights into the operational efficiency of the company.

Importance of a Balance Sheet

There are a few key reasons why a balance sheet is important. Here are a few of them:

Balance Sheets Examine Risk

A balance sheet lists all assets and liabilities of a company.

With this information, a company can quickly assess whether it has borrowed a large amount of money, whether the assets are not liquid enough, or whether it has enough current cash to fulfill current demands.

Balance Sheets Secure Capital

A lender will usually require a balance sheet of the company in order to secure a business plan.

Additionally, a company must usually provide a balance sheet to private investors when planning to secure private equity funding.

These are some of the cases in which external parties want to assess and check a company’s financial stability and health, its creditworthiness, and whether the company will be able to settle its short-term debts.

Balance Sheets are Needed for Financial Ratios

Business owners use these financial ratios to assess the profitability, solvency, liquidity , and turnover of a company and establish ways to improve the financial health of the company.

Some financial ratios need data and information from the balance sheet.

Balance Sheets Lure and Retain Talents

Good and talented employees are always looking for stable and secure companies to work in.

Balance sheets that are disclosed from public companies allow employees a chance to review how much the company has on hand and whether the financial health of the company is in accordance with their expectations from their employers.

Limitations of a Balance Sheet

Although balance sheets are important financial statements, they do have their limitations. Here are some of them:

Balance Sheets are Static

It may not provide a full snapshot of the financial health of a company without data from other financial statements.

In order to get a complete understanding of the company, business owners and investors should review other financial statements, such as the income statement and cash flow statement.

Balance Sheets Have a Narrow Scope of Timing

The balance sheet only reports the financial position of a company at a specific point in time.

This may not provide an accurate portrayal of the financial health of a company if the market conditions rapidly change or without knowledge of previous cash balance and understanding of industry operating demands.

Balance Sheets May Be Susceptible to Errors and Fraud

The data and information included in a balance sheet can sometimes be manipulated by management in order to present a more favorable financial position for the company.

Businesses should be wary of companies that have large discrepancies between their balance sheets and other financial statements.

It is also helpful to pay attention to the footnotes in the balance sheets to check what accounting systems are being used and to look out for red flags.

Balance Sheets Are Subject to Several Professional Judgment Areas That Could Impact the Report

For instance, accounts receivable should be continually assessed for impairment and adjusted to reveal potential uncollectible accounts.

A company should make estimates and reflect their best guess as a part of the balance sheet if they do not know which receivables a company is likely actually to receive.

Balance Sheets vs. Income Statements

Here are some key differences between balance sheets and income statements:

The Bottom Line

Balance sheets are important financial statements that provide insights into the assets, liabilities, and shareholders’ equity of a company.

It is helpful for business owners to prepare and review balance sheets in order to assess the financial health of their companies.

Balance sheets also play an important role in securing funding from lenders and investors. Additionally, it helps businesses to retain talents.

Although balance sheets are important, they do have their limitations, and business owners must be aware of them.

Some of its limitations are that it is static, has a narrow scope of timing, and is subject to errors and frauds.

A balance sheet is also different from an income statement in several ways, most notably the time frame it covers and the items included.

It is important to understand that balance sheets only provide a snapshot of the financial position of a company at a specific point in time.

In order to get a more accurate understanding of the company, business owners and investors should review other financial statements, such as the income statement and cash flow statement.

Balance Sheet FAQs

What is included in the balance sheet.

Balance sheets include assets, liabilities, and shareholders' equity. Assets are what the company owns, while liabilities are what the company owes. Shareholders' equity is the portion of the business that is owned by the shareholders.

Who prepares the balance sheet?

The balance sheet is prepared by the management of the company. The auditor of the company then subjects balance sheets to an audit. Balance sheets of small privately-held businesses might be prepared by the owner of the company or its bookkeeper. On the other hand, balance sheets for mid-size private firms might be prepared internally and then reviewed over by an external accountant.

What is the balance sheet formula?

The balance sheet equation is: Assets = Liabilities + Shareholders' Equity

What is the purpose of the balance sheet?

The balance sheet is used to assess the financial health of a company. Investors and lenders also use it to assess creditworthiness and the availability of assets for collateral.

How often are balance sheets required?

Balance sheets are typically prepared at the end of set periods (e.g., annually, every quarter). Public companies are required to have a periodic financial statement available to the public. On the other hand, private companies do not need to appeal to shareholders. That is why there is no need to have their financial statements published to the public.

About the Author

True Tamplin, BSc, CEPF®

True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.

True is a Certified Educator in Personal Finance (CEPF®), author of The Handy Financial Ratios Guide , a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University , where he received a bachelor of science in business and data analytics.

To learn more about True, visit his personal website or view his author profiles on Amazon , Nasdaq and Forbes .

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A business owner’s guide to balance sheets

Preparing balance sheets can help attract investors by painting a clear picture of your small business financials.

The best way for investors to know how you’re going to treat their money is to look at how you treat your money. Just as a traditional mortgage lender looks at a credit report to evaluate a potential borrower, an investor often makes decisions based on a business’s financial statements. This includes your balance sheet, which represents your assets, liabilities, and net worth in an easy-to-digest format.

The structure of a balance sheet is built around a basic financial accounting equation:

assets – liabilities = owner’s equity

Here’s a breakdown of those terms as well as valuable tips, resources, and examples to help you create a snapshot of your business financials.

Assets include the value of everything owned by and owed to the business. On a balance sheet, assets are usually split into current and non-current assets.

Current assets are cash and those items that are likely to become cash in one year or less, such as inventory, accounts receivable (amounts due in the short term), and notes receivable (amounts due within 12 months).

Fixed assets , such as real estate and equipment, are categorized as non-current because they are less likely to sell in a year or less.

For purposes of the balance sheet, assets will equal the sum of your current and non-current assets — less the depreciation (or decrease in value over time) of those assets.

Liabilities

On the other side of the equation are your liabilities, both short- and long-term. These are the monetary obligations you owe to banks, creditors, and vendors.

Short-term liabilities include accounts payable, such as monthly invoices owed to vendors and creditors, and notes payable owed to others within the next 12 months.

Long-term liabilities , or those due more than a year away, include a mortgage balance payable beyond the current year.

Owner’s equity

The last component of the balance sheet is owner’s equity, sometimes referred to as net worth. This is your net investment in the company. It’s equal to total assets minus total liabilities. The financial statement should balance, showing assets equaling liabilities plus owner’s equity. This is one reason it’s called a balance sheet.

Making balance sheets work for you

Balance sheets focus primarily on tangible assets. These are the ones you can see and measure, such as inventory, machinery, vehicles, and land. Companies usually have some mix of tangible and intangible assets.

While all balance sheets follow the same equation, the types of accounts listed will vary based on the type of business. Product-based companies, such as retailers, sell goods to consumers and have overhead expenses like inventory and real estate. Service-based companies, like dry cleaners or law firms, sell services instead of goods, so they do not typically have inventory or raw products on the balance sheet. The method and time period in which payment is accepted may also change what’s listed in the balance sheet.

Balance sheets are usually drafted at the end of accounting periods: monthly, quarterly, or yearly. It’s a good idea to look at these documents alongside others such as income statements (which show long-term profits minus losses) and cash-flow statements (which show how quickly revenue is collected). A financial advisor can help you create and analyze these financial statements for a clear picture of your cash flow.

Helpful resources

Balance sheets can be created with ease, even if you’re not an accounting professional. Beyond balance sheets, you can improve your chances when applying for credit by taking key steps to prepare and learning how to develop a good credit application . The U.S. Small Business Administration (SBA) offers free online learning courses on running a successful business as well as live webinars, which may include courses on accounting.

Bookkeepers and Certified Public Accountants (CPAs) can also be invaluable. Consider enlisting a bookkeeper for day-to-day accounting and a CPA to prepare and analyze statements to help plan your financial future. With an accountant, financial advisor, and banker, you can form a helpful team to assist you.

Wells Fargo is here to help you get your balance sheets right and present your business in the best way possible. Explore our products and services and make an appointment today.

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Small business financial planning: setting yourself up for growth

Michael Henson Content Writer

Jun 19, 2024

You’re a small business owner, but you have big dreams. You want to see your business grow to become robust and profitable, but you aren’t sure how best to go about it. That’s why you need to take a serious approach to planning for business growth. 

Planning for growth means creating a successful small business financial plan, one which considers business goals, financial goals, and risk management . Working with a financial advisor is the best way to create a plan that includes retirement planning, funding options, and preparing for worst case scenarios. This article gives you financial planning tips to get you started to make informed decisions. 

Creating a financial plan for your small business

To set your small business up for success, you need a solid financial plan that includes both short-term and long-term business and financial goals, as well as strategies to achieve them. Then you can make informed decisions, access funding, and prepare for risks. Here are some tips to get you started:

Assess your financial situation

Every effective financial plan is built on accurate and reliable financial information. If you don’t already have a small business budget that charts your revenue, outgoings, and profit margins, now is the time to create one. You can download our small business budget planning template to simplify the process. 

Determine your goals

Next, figure out your key business and personal goals. Do you want to increase revenue by 20% this year? Expand into a new market? Be able to retire by the age of 50? Your financial plan should cover both short-term goals for stability and growth as well as long-term goals to build wealth. 

Manage risks and expenses

Now it’s time to evaluate potential risks and expenses. Speak to a financial advisor to determine appropriate risk management strategies for possibilities like economic downturns, loss of key customers, or expensive equipment failures. Your balance sheet shows your financial health, so look for ways to cut excess spending and budget for unexpected costs. Successful small businesses plan for worst-case scenarios to avoid crises.

Explore funding options

Think about how you will fund expanding your goals and operations. Options include business loans, lines of credit, crowdfunding, and personal investment. Meet with a financial advisor to evaluate what makes sense for your needs and risk tolerance. They can help you find good options and negotiate the best rates.

Setting business goals and assessing risks

As a small business owner, you need to define your business goals and plan for risks to set yourself up for growth. These should include personal and business goals, and both short-term aims and long-term plans. You can then assess potential risks that could hold you back from achieving your goals, and work out ways to avoid or mitigate them.

Determine your personal financial goals 

As a small business owner, your personal and business finances are closely linked. Think about your own financial goals, like saving for retirement, college funds for your kids, or paying off debt. A financial advisor can help you create a comprehensive plan that includes both business and personal financial goals. 

Set business goals

Think about why you started your business and what you want to achieve in the next 1-3 years. Do you want to increase revenue or profits? Open a new location? Setting specific, measurable goals will help guide your financial planning. Work with a financial advisor to determine how much money you need to achieve your goals and the funding options available, like small business loans, crowd-funding, or business credit cards. 

Manage risks

Identify potential risks to your cash flow and profits, like economic downturns, loss of key customers, or supply chain issues. Come up with a worst-case scenario plan that includes cutting costs, alternative funding sources, and ways to increase revenue. Planning for risks will help you make better informed decisions if problems arise. You’ll want to revisit your risk assessments regularly as your business grows and evolves.

Managing finances and cash flow

To set your small business up for growth, you need to get a handle on your finances. As a small business owner, this means developing realistic business and financial goals, managing risks, and planning how to fund future growth.

Successful small businesses monitor their financial health regularly and make changes to support growth and stability. That’s why you need to look at your balance sheet, income statement, cash flow statement, and key ratios to determine your company’s financial health. 

The balance sheet shows your assets, liabilities, and equity at a given point in time. The income statement shows your revenue, expenses, and profits over a period of time. Analyzing these financial statements will tell you if you have enough cash on hand, if expenses are too high, if you’re overleveraged with debt, or if profits are growing. 

Retirement planning options for small business owners

Saving for retirement is crucial for your long term financial health, and requires balancing your business’s financial health today with your own financial goals for the future. Speaking to a financial advisor who specializes in small business planning can help determine the right mix based on your business goals and risk tolerance. There are several options tailored to small businesses that provide tax benefits and flexibility.

Simplified Employee Pension (SEP) IRA

A SEP IRA allows you to contribute up to 25% of your salary, or $66,000 for 2023 , whichever is less. Contributions are tax-deductible and the plan is easy to set up and administer. A SEP IRA provides flexibility, since you can vary contributions from year to year based on your business’s financial performance.

Individual 401(k)

An individual 401(k), or solo 401(k), operates similar to a traditional 401(k) but is designed for self-employed individuals and small business owners. For 2024, you can contribute up to $23,000 as an employee , plus up to 25% of your compensation as an employer, for a total of $69,000. A solo 401(k) allows for loans and hardship withdrawals, and contributions can be made up until your tax filing deadline.

Profit-sharing plan

A profit-sharing plan allows you to contribute a percentage of your business’s profits to a retirement plan. Contributions are discretionary and the plan provides flexibility in how profits are distributed to employees. The contribution limit is 25% of compensation or $69,000 for 2024 , and contributions are tax deductible. Profit sharing plans require non-discrimination testing to ensure benefits are fairly distributed among employees.

Effective financial planning is the key to successful business growth

By following these tips and taking advantage of resources for planning for small business, you can develop a successful small business financial plan to guide your company to growth and prosperity. Keep refining and revising your plan as your business evolves. With the right plan in place, you can make informed decisions to ensure the financial health and success of your business for years to come.

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What is Financial Projection: How to Make Financial Projections for Your Business Plan?

Ryan Patrick

A financial projection is a primary building block for new and existing companies. As a business owner, you should plan for the future or to stay in line. These projections forecast your business cash flows and expenditures balance sheet and income.

Bankers and investors use these projections to know how to repay loans and what you will do when your business grows.

Incorpuk in this blog explains how to create a financial projection plan for your existing or start-up business to thrive.

What is the Financial Projection of your Business Plan?

Financial projection for your business represents a company forecast for its future monetary performance. Established companies use projections based on previous data to illustrate critical metrics. Expenses, profits, revenue, and cash flow are anticipated to evolve.

Many companies generate financial projections covering two to five years, and most review and update these forecasts once a year or more.

Creating financial projections is crucial when crafting a business plan. Accurate forecasts enable business owners to set objectives, manage cash flow, make informed decisions, attract investors and identify areas needing operational enhancement.

What are the uses of Financial Projections?

Business financial projections are vital for several reasons:

• When starting a business, financial projections will help you plan for your start-up budget, estimate when the company will become profitable and establish benchmarks to achieve financial goals.
• Having financial projections allows you to set goals and stay focused when already in business.
• Established and start-up businesses must provide financial projections to demonstrate their growth to lenders and investors when securing external financing.

What Information do you Include in a Financial Projection for your Business?

Before creating the financial projections, you must collect some data. If you are already running a business, you can use three financial statements that you already possess. They include annual income statements, balance sheets and cash flow statements.

For a start-up owner, since you don't have historical data, ensure to do market research. Examine your competitors' pricing strategies, do a market analysis, and look at any available public data that will inform your financial projections. Start conservative estimates and straightforward calculations to help you start, and you can expand your projections with time.

Different financial projections may differ in data details; however, forecasts depend on the following items:

1. Cash flow statement

The cash flow statement indicates the money that flows in and out of a company at a specific time. Cash flows are categorised into three parts:

• Operating activities : these cash flows are the core of business operations, including cash inflows from goods and services sales and expenses outflows such as salaries, taxes and rent.
• Financial activities : These cash flows involve financial transactions like obtaining funds from investors through banks, paying debt interest, allotting or repurchasing shares, and dividend payments.
• Investing activities: are cash flows associated with the purchase or sale of long-term investments, such as physical assets (property) and intangible assets (intellectual property). They also cover bonds, stocks, and other securities sold after holding them for at least a year.

2. Income statement

Projected income statements forecast a business revenue and outlay for a given time.

It is presented as a table with multiple line items for every category. The sales projections may consist of the sales forecast for each product or service, mainly broken down by month. Expenses follow a similar format, listing expected costs by category, including fixed expenses like rent salaries and variable costs (transport and raw materials).

The projected income statements also give you a net income projection calculated as the difference between the revenue and expenses, including interest payments and taxes. This figure forecasts your profits or losses, so this document is mainly called a profit and loss statement.

3. Balance sheet

A balance sheet portrays your business's financial position in a specific time frame. Your balance sheet should include these items:

Assets are tangible items a business possesses currently and in the future, such as equipment, money inventory and accounts receivable. There are also intangible assets such as trademarks, copyrights, intellectual property and patents.

Shareholder equity is determined by subtracting total liabilities from total assets. It shows the cash or capital the business would have left if it paid all its liabilities or liquidated. Business equity refers to the capital invested by the business's owners and members.

This document is also called a balance sheet because assets equals liabilities and shareholder equity.

Steps to Create Financial Projections for a Start-Up

Here are the steps to create financial projections for your business.

1. Project your sales and spending

When developing your business plan, you should list key expenditures and operating costs your business needs to start. You should include recurring expenses such as:

• Raw materials

Remember to include the one-time purchases like:

• Website design

Research industry spending to better estimate these costs. Also, develop sales forecasts to project predicted monthly revenues. Conducting a thorough analysis of your potential market will help you generate realistic figures.

2. Develop financial projections

Add your expenses and revenues in the cash flow projection, detailing monthly inflows and expenses in the first months of operations. From there, you can switch to creating quarterly or yearly projections for the second year.

If you want to develop financial projections, use an Excel spreadsheet or any accounting software. Remember, sales don't equal the money in the bank. Record them as cash only when you expect to receive payment, as per industry averages and your team's previous experiences.

You can develop annual projected income statements and balance sheet projections using cash projections.

3. Assess your financial requirements

The financial forecast will help you ensure that your business plan is realistic, identify shortfalls, and determine any financing needs. This document is also essential when developing a case for business loans.

4. Use your financial projection for planning

You can use projections in various cases, such as optimistic and pessimistic. These projections can be vital when forecasting financial impacts on each situation.

They also help you analyse the impacts of diverse strategies for your start-up. What if you sell at a different price? What if you collect bills quickly? What if you have more efficient equipment? Incorporating different options allows you to see how each decision would affect your finances.

5. Plan for contingencies

Always plan for any unexpected event that might disrupt your projections. You can do this by setting aside money just in case. Most business owners keep enough money for 90 days of operation in the bank or credit line.

6. Monitor your projections

Once you start your business operations, compare your financial projections against the actual results and see if you're on track or if you need to adjust. By monitoring, you will learn your business cash flow and identify potential shortfalls early, when they are typically easier to manage.

Creating a Financial Projection for an Existing Business

You can use these steps if your business is already in operation:

1. Determine your projections' purpose and timeframe

Your business projections details may vary based on their purpose. They depend on whether they are for:

• Internal planning pitching investors
• Monitoring business performance over time
• Setting a time frame for monthly, quarterly, yearly, or multiyear dictates the rest of the steps.

2. Collect necessary financial data

You should collect relevant previous financial statements such as cash flow statements, balance sheets and annual income statements.

3. Forecast expenses

Identify business future spending depending on the direct cost of production operating expenses (one-time costs and recurring). Consider anticipated changes in expenses, as these can vary with business growth, market presence, and the introduction of new products.

4. Forecast sales

You should forecast sales for every revenue stream, segmented monthly. These forecasts are determined by market analysis or historical data, and they must account for foreseen or probable shifts in market demand and pricing.

5. Create your financial projections

After forecasting your revenue and expenses, you can add that data to the cash flow statement and cash flow calculator. Using this information, you can see your income statement.

Benefits of Financial Projections

Developing well-outlined financial projections for your start-up or existing company offers numerous advantages. Concentrating on developing and sustaining effective financial forecasting for your business will:

• Assist you in fine-tuning your price list
• Help you in making critical financial decisions for the company in future
• It helps you to strategise for business growth and expansion
• It helps in identifying vital financing needs in future
• Show bankers how you will repay your loans
• Illustrate to investors how you will repay them
• It helps when strategising the production plan
• It allows you to keep track of your cash flow in future
• Financial projection is helpful when planning your expenditures strategically

Incorporate Your Company with Incorpuk Today

At Incorpuk, we will help you file accurate information when you register your company through us. We will help you with incorporation articles, a registered office address, and all you may need to register your company in the UK. Contact our team if you seek any information; we will gladly assist.

Financial projections are a vital part of business. You need them whether you're a start-up or an established company. It is advisable to follow the practices above to ensure you enjoy the full benefits of a comprehensive financial projection.

To make it easier, you can use an accounting software of your choice to help you develop financial forecasting. They can easily generate the reports you need, allowing you to view your business performance. Do you have any questions about how to make financial projections for your business plan? Kindly contact one of our experts here for assistance.

Bank of Japan to trim bond buying, keeps rates steady

• Medium Text

• BOJ keeps short-term rate target unchanged at 0-0.1%
• Board keeps bond buying pace at 6 trln yen per month
• BOJ to lay out details on bond-taper plan at July meeting
• Ueda signals chance of July rate hike
• Yen, Japan yields fall on view BOJ cautious on policy

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Australia consumers balance budget relief against rate risks

Australian consumer sentiment rebounded modestly in June as the promise of imminent tax cuts lightened the mood, a survey showed on Tuesday, though the risk of yet higher borrowing costs loomed in the background.

UAE’s IHC shareholders approve Dhs5bn share buyback program

The conglomerate said the rationale behind the buyback is driven by its robust financial standing, characterised by significant cash flow and a strong balance sheet

UAE’s International Holding Company (IHC) said on Thursday that its shareholders approved its $1.36bn (Dhs5bn) share buyback plan, which represents around 0.6 per cent of the conglomerate’s capital.

The buyback, set to be implemented over a one-year period following the acquisition of regulatory approvals, is not just a financial move. It is a strategic decision aimed at enhancing shareholder value by increasing earnings per share, IHC previously said in a regulatory filing.

“We initiated a Dhs5bn buyback programme in May, supported by the company’s strong financial position, including significant cash flow and a healthy balance sheet,” says Syed Basar Shueb , the CEO of IHC.

“We believe that there is significant value in multiple sectors that will be important in the future.”

The Abu Dhabi conglomerate said the rationale behind the buyback is driven by its robust financial standing, characterised by significant cash flow and a strong balance sheet

IHC ’s net profit for the first three months of the year rose by a record 87.6 per cent to Dhs8.02bn, almost double the Dhs4.27bn for the corresponding period a year ago, revenue reached Dhs19.29bn, up 22.5 per cent from Dhs15.74bn.

“The growth in the previous quarter was driven by strong performances in core divisions including real estate and construction, marine and dredging, technology, and our contracting business,” says Shueb.

Founded in 1998, IHC has grown exponentially over the years from a $200m firm with interests in fish farms and real estate into a conglomerate with more than 900 subsidiaries and a market capitalisation of $239bn (Dhs877bn) as of May 27, 2024 – bigger than Walt Disney, McDonald’s or L’Oréal.

Read: Exclusive: Syed Basar Shueb on how IHC is cracking the growth code

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