Your balance sheet provides a snapshot of your company’s financial situation. It’s a report that quickly reveals insight into the financial health of your business at a specific point in time.
It is typically divided into 2 sections: assets and financial obligations (liabilities). The balance sheet looks beyond your cash flow to better understand the whole value of the company in terms of cash, equipment, and shareholder value.
Keep reading to better understand what makes up a balance sheet and how your small business can use it.
Current assets refer to items that could be converted into cash within a year. Cash is the most basic current asset and includes funds that can be pulled from non-restricted banks or written as checks. Additional current assets for your business include:
- Accounts receivable, which are short-term payments you are owed (like unpaid invoices).
- Inventory on hand that will turn into cash when you sell it.
- Raw materials and “work in progress,” goods that you are working to turn into inventory.
Current assets are also most likely to move. For example, an invoice will get paid or inventory will sell. The company doesn’t plan to sit on the asset as it appreciates or depreciates.
Conversely, noncurrent assets refer to items that aren’t easily turned into cash or aren’t expected to become cash within a year. They include both tangible assets (property, machinery, equipment, etc.) and intangible assets like copyrights and your brand.
A key phrase with noncurrent assets is that they “aren’t expected to become cash.” While an invoice is expected to get paid within a month, your business is unlikely to sell a fleet vehicle that you just bought last year. While you could, in theory, convert it into cash within a year, it will most likely stay noncurrent.
After you review your assets, the next step is to understand your liabilities. These are the financial obligations that a business owes. Like your assets, these come in current and long-term form.
Current liabilities are addressed in the short-term and must be paid within a year—including accounts payable, payroll, and expected payments toward small business loans.
Long-term liabilities are debts that will take more than a year to pay off, like a mortgage or payment on your company fleet.
Shareholder equity refers to a company’s total net worth. At its most basic level, this column features the initial amount of money invested in a business. Then, if a company decides to reinvest its earnings in the company, that amount is transferred to the equity.
To balance out the sheet, accountants use the formula:
Assets = Liabilities + Shareholder Equity
This equation ensures that both sides of the sheet equal each other and your financial records are accurate.
If assembling a balance sheet feels like an intimidating process, don’t worry. There are tools and services that streamline bookkeeping and make it easier to develop healthy financial habits as an entrepreneur. Look into the services offered by Sunrise to see how they can help. With better organization and planning, you should have a clearer picture of your financials and a better understanding of accounting over time.