Balance Sheet Advice for the Small Business Owner

If you are an owner of a small business it is extremely important for you to be aware of your company’s financial status and the best way to do that is to have an accurate balance sheet.  If this information is kept up to date on a quarterly basis, the balance sheet will help you avoid future surprises.  It’s simple accounting – assets must be balanced by and equal to the liabilities plus the owner or shareholder’s equity.

Understanding Assets

There are two types of assets – current or liquid assets and fixed assets.  Current or liquid assets include the following:

• Cash that is immediately available
• Accounts receivable or money that is owed to you
• Inventory currently in stock
• Expenses paid in advance – insurance premiums
• Investments, securities and money-market accounts

Any items that can be easily sold or moved are fixed assets, such as furnishings, equipment, vehicles, etc.   Beyond current and fixed assets, items that are intangible, such as goodwill, copyrights and patents, are also considered assets on a balance sheet. It is important to note that money that is owed to you that you expect will not be paid is classified as a Reserve for Bad Debts, which decreases the amount of the Accounts Receivable on the balance sheet.

Understanding Liability

When entering liabilities onto the balance sheet, the owner needs to include all of the business’s debts, both current and long term. Current liabilities include accounts payable, sales and payroll taxes, payments on short-term business loans such as a line of credit, and income taxes. Long-term liabilities are those that are paid over a longer period of time, generally over more than a year. These include mortgages and leases, future employee benefits, deferred taxes and long-term loans.

Understanding the Equity Portion of the Balance Sheet

The equity portion of the balance sheet includes the value of any capital stock that has been issued, any additional payments or capital from investors beyond the par value of the stock, and the net income that has been kept by the business rather than distributed to owners and shareholders.

In order to be sure that all of the information on the balance sheet is correct, you can double-check your numbers by subtracting assets from liabilities – the result should equal the equity amount.

Why is a Balance Sheet Important?

Balance sheets are invaluable because it lays out your company’s financial situation at any single moment in time, telling you whether your company is financially healthy or can alert you to some of the following issues:

• Times when inventory is outpacing revenue, thus alerting you to a need for better management of your inventory and production process
• Cash flow problems and a shortage of cash reserves
• Inadequacies in your cash reserves that are making it difficult to invest in continued growth
• Problems with collecting accounts receivables

If you have any questions or need assistance with preparing these documents for yourself or don’t have the time, then let Baldwin Accounting take over and give yourself the information that you need.  We provide full service bookkeeping for a monthly fee starting as low as $100.