A small business balance sheet is a snapshot of finances that provides insight into the financial health of your company. The sheet details what the company owns versus what it owes and prevents you from guessing how the business is performing
Basics of Small Business Balance Sheets
A small business balance sheet consists of a company’s assets, liabilities, and an overview of owner equity. You put a lot of effort into making sure your business is acquiring customers. You need to know how much money you have and how much you have available to spend. ZenBusiness offers customers who buy any of our business formation plans a free, no-obligation accounting assessment to review their bookkeeping, accounting, and tax needs during their first year of business.
What do small business balance sheets look like?
A small business balance sheet consists of two vertical columns or horizontal sections. Vertically, the column on the left lists the assets of the company. The column on the right lists the liabilities and the owner’s equity.
These are the two most common ways to format a small business balance sheet, but the information is the most important part.
How do you create a balance sheet for a small business?
The first step in creating a balance sheet for a small business is to determine your assets, liabilities, and owner equity. It’s important to have accurate information, and it’s worth taking the time to make sure you have all the specific areas accounted for.
Small Business Assets
The asset column is subdivided into two sections. This separation serves to help you determine the ease of liquidating each asset. Long-term assets often consist of real estate or equipment that may take an extended period of time to sell and convert to a current asset.
Assets that can be easily converted to cash within a single calendar year are current assets. Example of current assets include:
- Cash: Funds immediately available, such as money in a checking account.
- Accounts receivable: Money owed to your business by customers, suppliers, or any other vendor who has made a purchase without fulfilling payment.
- Notes receivable: Notes receivable due within a year. These may also be referred to as “promissory notes” and are written agreements for one party to pay a certain amount on or before a specific date. If the note isn’t due within the year, it’s a long-term asset.
There are differences between small business accounts receivable and notes receivable. An account receivable is typically a more informal agreement that doesn’t accrue interest. Notes receivable often include a legally binding obligation of payment and interest on one more future date.
Long-term assets are real estate and other property owned by the business. These things can’t be sold immediately to provide cash for the company. Long-term assets are also called “fixed” assets. Their value may depreciate but otherwise doesn’t change.
- Land: Unlike other fixed assets, land typically doesn’t depreciate in value over time. Sometimes it even increases.
- Buildings: Buildings owned by the company are long-term assets that do depreciate.
- Office equipment: Any office equipment of value such as computers, projectors, printers, scanners, and fax machines would be considered long-term assets. Their value depreciates over time.
- Machinery: Any production facility equipment used to make your products or provide services.
- Vehicles: Any company-owned vehicle.
To calculate total fixed assets, take the total overall value of your fixed assets and subtract the total amount that your company has depreciated them.
Calculate your total assets by adding up both short- and long-term assets listed.
Small Business Liabilities and Owners’ Equity
This side of the small business balance sheet is often referred to as the liabilities section, but it also includes owners’ equity. Liabilities include all debts and obligations owed by the business.
Small business current liabilities are debts owed to creditors by your business.
- Accounts payable: Short-term obligations owned by your business. These can include anything purchased on credit by the company.
- Notes payable: Short-term collection cycle invoices such as building mortgage payments or vehicle payments.
- Accrued payroll and withholding: All unpaid earned wages or withholding owed to employees of the business.
Debts falling into the category of current liabilities are typically those that must be paid within a year.
Long-term liabilities are small business debts and obligations owed by the company. These payments are due more than a calendar year from the current date. Mortgage notes are the most common type of long-term small business liability.
Owners’ Equity or Stockholders’ Equity
Owners’ equity is what has been invested in the business and is left after paying debts. For a sole proprietorship, owners’ equity represents cash and property put into the business, minus withdrawals, including those for personal living expenses.
Corporation owners’ equity is called shareholder or stockholder equity. Initial investments in the business, coupled with retained earnings that are reinvested, make up shareholders’ equity. Reinvestment can occur after deducting any distributions to shareholders.
How do small businesses balance books?
Your small business balance sheet is the most important part of balancing the books. Your first task is to choose an accounting period. Most companies choose to balance monthly or quarterly. When you subtract liabilities from assets, you should obtain a number that is equal to the equity in your business. If that’s not what you end up with, it’s time to do a deeper analysis. Whether you have just made a typo or you are missing pieces of information, it is worth the effort to get it correct.
Debt Ratio for a Small Business
A business’s debt ratio is the amount of total liabilities to total assets. High debt ratio implies that a larger portion of the company’s assets are financed by debt.
Calculate debt ratio by dividing the amount of debt by the amount of assets. For example, if your business has $50 of debt and $100 of assets, the debt ratio is 50%.
Acceptable small business debt ratios vary widely across industries. Capital-intensive companies often have higher debt ratios than other businesses. Keeping an accurate small business balance sheet will help you keep track of your company’s assets and liabilities, so you can easily determine your debt ratio.
What if I’m a sole proprietor?
It is important to have a solid understanding of the company’s finances in relation to your personal finances. Sole proprietors have the ability to use personal income to supplement business revenue as needed. Keeping a balance sheet is a good way to keep track of shortfalls, though it’s not required. Without a balance sheet, trends up or down may go unnoticed until they become a problem.
Who looks at a small business balance sheet?
A small business balance sheet is important for potential investors who are considering investing in your company or lenders who need to understand the business’s finances before loan approval. The balance sheet is a strong indicator of the health of your business. Evaluating a company’s assets and liabilities over a period of time can reveal important trends in the market and profitability. There are several indicators that can be provided by a small business balance sheet.
Cash Conversion Cycle
The balance sheet will provide indicators as to how efficiently the business manages accounts payable, receivable, and inventory. This is called the cash conversion cycle. It’s a measure of how long it takes for a company to collect payment after a transaction. It also calculates the average time it takes a company to pay suppliers and vendors, as well as taking into consideration how long inventory sits on a shelf before it is sold. The shorter the cash conversion cycle, the better.
Fixed Asset Turnover Ratio
Fixed assets are generally expensive purchases. Investors and lenders will want to understand how much revenue is being generated from use of those assets to ensure they are being used efficiently. This is calculated by dividing net sales by average fixed assets. The higher the number, the more revenue is being generated.
Return on Assets Ratio
A big profitability indicator is return on assets (ROA). This number demonstrates how much net income is derived from the company’s total assets. It can also be used as a metric for asset performance. Average total assets are calculated by adding the total assets from the beginning and ending of the period and dividing by two. Calculate ROA by dividing net income by average total assets. Net income is found as retained earnings on your small business balance sheet.
Small Business Balance Sheet Tax Reporting
C corporations are required to submit a balance sheet as a part of their annual tax return and Form 1120. All information should match up with the business’s books and records. If the business has less than $250,000 in receipts and total assets at the end of the year, the balance sheet doesn’t need to be submitted. ZenBusiness provides those who purchase a business formation plan a no-obligation consultation regarding tax needs, removing much of the guesswork.
Balance Sheet FAQs
- What is a balance sheet for a small business?
A small business balance sheet reports a company’s assets, liabilities, and equity at a specific point in time. It can help you determine what your business owes to others and what is owed to you. This provides a big picture overview of the health and profitability of your company.
- How do you create a balance sheet for a small business?
Determine accurate numbers for your business’s assets, liabilities, and equity. Set up a document using your preferred format of rows or columns. You may also choose to use a template.
List all assets and their current value;
List all debts and liabilities; and
Subtract the value of liabilities from the value of assets.
The result is the equity/net worth of a business, which is a primary indicator of financial health.
- How do small businesses balance books?
Create and maintain accurate monthly or quarterly balance sheets to ensure that your assets minus liabilities equal the amount of equity in your company. If the numbers don’t initially match, conduct diligent research to identify mistakes or omissions that cause discrepancies
- Do sole proprietors need a balance sheet?
Generally, sole proprietors don’t require a balance sheet to operate a business. Despite the lack of necessity, it’s a good idea to have one to give you a clear understanding of the financial health of your business.