When you’re a business owner, it’s important to be an accurate accountant. You may be required to keep books and prepare a balance sheet for your business for tax, legal and/or regulatory purposes. Additionally, you may want to voluntarily prepare a balance sheet to help you monitor your business assets, liabilities, and net worth. Knowing how to prepare or read and understand a balance sheet is an essential skill for all small business owners. A balance sheet is part of your company’s financial statements which also include the income statement, statement of equity and cash flow statement. The financial statements are linked. For example, the balance sheet is linked to the cash flow statement because the cash balance that appears on the balance sheet is the ending balance used in the cash flow statement.
Financial statements help you and others (eg investors, lenders) assess the financial health of your business.
Find out what a balance sheet is for and how it can help you identify the financial strengths and weaknesses that exist in your business.
What is a balance sheet used for?
A balance sheet is a financial statement that shows a company’s assets, liabilities, and equity.
Balance sheets are prepared at a specific time (eg month end, quarter end, year end).
Note: This is not a time period as the balance sheet is prepared at a given time. A balance sheet is a financial statement that shows a company’s assets, liabilities, and equity.
A balance sheet includes the following:
- Assets: It’s everything your business has of value. Assets can be current or non-current. This includes cash and cash equivalents, prepaid expenses, accounts receivable, real estate, inventory, investments, intangible assets and other assets with value.
- Passives: This includes everything your business owes. Liabilities can be current or non-current. Some examples include interest payable on borrowings, accounts payable (eg, rent, utilities), long-term debt (eg, loans), and deferred tax liabilities.
- Equity: This is everything that belongs to the shareholders of your company after taking into account any liabilities. Also known as net assets, shareholders’ equity is the difference between a company’s total assets and liabilities. In small businesses or sole proprietorships (PDF)net assets are called equity.
Four ways to use a balance sheet
Preparing a balance sheet can help in a number of situations. Here are four ways to use a balance sheet for your business.
1. Assess the financial situation and health of your business
A balance sheet gives you an overview of your company’s financial situation at any given time. In addition to an income statement and a cash flow statement, a balance sheet can help business owners assess the financial condition of their business. For example, when your company’s current assets exceed its current liabilities, you are probably in a good position to cover all short-term financial obligations.
2. Compare your business to your competitors
Reviewing your balance sheet can also help you determine how you stack up against other companies in your industry. If you want to improve the financial health of your business, use the balance sheet to determine which financial habits need to be adjusted to help you be more competitive. You can use the following ratios to compare your business with others.
- Rate of endettement : This helps you determine the financial leverage of your business. To use this ratio, divide your company’s total liabilities by its equity.
- Quick report: This helps you determine if your business has enough short-term assets that it could liquidate to pay off short-term debt. To use this ratio, add up your cash and cash equivalents, marketable securities, and accounts receivable. Then divide the sum by the current liabilities.
3. Conduct Financial Health Assessments
A balance sheet can help you track your business performance, for example, your business’s ability to meet its financial obligations. Plus, it lets you compare your current balance sheet to a previous balance sheet to better understand how your business has changed over time. For example, have your business assets increased or has your business accrued more debt?
4. Do you support an existing or potential investor’s review of your company’s equity?
Investors use a company’s balance sheet to assess a company’s net worth as part of their review of possible investments. Investors also use the balance sheet to calculate financial ratios to determine a company’s financial condition, including:
- Rate of endettement : This represents a company’s total liabilities divided by its equity. See formula above. The debt-to-equity ratio helps companies and investors determine the extent to which a company finances its operations with debt relative to its own funds.
- Quick report: This determines whether a company’s current assets or short-term assets are sufficient to cover its current short-term liabilities. See formula above.
Tips for preparing a balance sheet
The following tips can help you prepare a balance sheet:
- Determine the declaration date (for example, December 31) and prepare your balance sheet at regular intervals (for example, annually) – this will allow you to compare the current financial situation of your business to previous periods and track changes.
- List your business assets and liabilities and determine which are current and which are not current – it will help you better understand what your assets and liabilities are and how best to categorize them.
- Calculate equity and check that your balance sheet is balanced – this will help you spot errors.
- Use a balance sheet template or example – this will help you with the format.
Once you know where your business stands, meet with a local merchant banker to learn more about financing options and how opening a business bank account or applying for a card professional credit may be right for you.
For Informational/Educational Purposes Only: The opinions expressed in this article may differ from those of other JPMorgan Chase & Co employees and departments. The opinions and strategies described may not be appropriate for everyone and may not are not intended to constitute specific advice/recommendations for any individual. You should carefully consider your needs and goals before making any decisions and consult with the appropriate professional(s). Prospects and past performance are not indicative of future results.
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