Business owners take big steps when maneuvering through the challenges of running a business while keeping their finances out of the red. To build a business, they hire people, take risks, and keep their financial statements current.
Some entrepreneurs find reading a balance sheet fascinating while others not so much. We encourage you to become familiar with using a balance sheet template because lenders and investors review how you use your resources. They analyze critical items such as available cash, accounts receivable, and equipment along with other assets, liabilities, and equity to get a full picture of your company’s financial health.
This post focuses on the components of a balance sheet, its benefits, and its appeal to lenders when applying for a loan. You can also download our FREE balance sheet template to start using this financial statement to strengthen your business.
What is a balance sheet?
A balance sheet is one of three financial statements containing important information about your company. At a glance, anyone reviewing this document can evaluate your assets, liabilities, and shareholders’ equity. Liabilities and owner’s equity equal the assets listed on the balance sheet.
They help business owners make informed decisions about their return on investment and help predict a business’s ongoing financial health.
Because the financial document is dated, reviewers have an up-to-date summary of what your company owns, its debts, and how much the owner has contributed to the business. That’s why business owners use a balance sheet template to input data and get an instant snapshot of their finances.
Whether you complete your accounting in-house or hire someone, keeping your financial statements current to include income and cash flow statements is highly recommended.
Some owners only review their financial statements at tax time but they should be reviewed monthly.
What is on the balance sheet?
There are three main components listed on a balance sheet.
These are resources the company owns to include current assets such as cash, amounts others owe you called account receivable, and inventory on hand.
Long-term assets are items that have a useful life extending beyond a fiscal year or operating cycle. Examples include buildings, land, and equipment.
Patents, copyrights, and trade secrets are also considered assets owned by a business.
Separated as current and long-term liabilities, these are amounts the company owes to others.
Short-term liabilities include accounts payable, demand loans, and other debts payable within one year.
Loans, mortgages, and leases are considered long-term liabilities.
Equity is listed in the form of cash, property, capital stock shares and options, and retained earnings (profit that hasn’t been distributed to one or more owners).
The net owner’s equity is the difference between assets minus liabilities and represents what the business owner has invested into the business.
If your business has more liabilities than assets, then your finances are considered unbalanced.
Benefits of using a balance sheet
Using a balance sheet template is similar to how a borrower uses a mortgage calculator. It’s a financial tool to not only predict a business’s financial health but provides these additional benefits:
Operate in the black
It’s frightening when your business has more liabilities than assets. By using a balance sheet template, you see in which areas your business falls short such as maxing out a business credit card or having a decrease in revenue. Then, you can make immediate adjustments and corrections to compensate for inconsistencies.
Determine working capital needs
Business owners prefer having 30 to 90 days of working capital to cover operating expenses. That gives them a cushion of money should income decrease, or expenses increase.
You can determine whether your business structure can sustain itself on a short and long-term basis. The numbers on a balance sheet indicate a business’s profitability, efficiency, and ability to pay debts (solvency).
Ascertain net worth
A balance sheet reveals how well your company receives income and pays debts. You can review your current liabilities, which are listed together, and make adjustments to your assets to improve cash flow.
Figure financial ratios
The current debt and liquidity ratios are figured using the information on a balance sheet and show a business’s short-term and long-term profitability and sustainability.
How can the balance sheet help you get a loan?
Numbers don’t lie.
A balance sheet indicates when a company increases profits over time, can compensate for unexpected expenses, and can sustain growth.
Lenders want to see that your business makes a profit, whether you have enough working capital, and if your business has a favorable history of managing debt efficiently.
A balance sheet has all this important information.
A balance sheet is required by the SBA for loans over $350,000
A balance sheet shows investors and lenders that you have plenty of cash on hand to pay debts. They also review what liquid assets you have available that can be converted into cash, such as mutual funds, money market assets, or accounts receivable.
In short, lenders see you as creditworthy rather than a financial risk. Likewise, they use the information on the balance sheet to figure your debt-to-income and accounts receivable ratios. That’s why it’s necessary to use a balance sheet template.
Even if your lender doesn’t ask for your balance sheet, it’s a good idea for you to have it so you can make sure you find the loan that best suits your needs.
Before approaching a lender, make sure to increase your short-term assets, reduce your short-term liabilities, and increase the owner’s equity. Doing so optimizes your financial position with lenders and may be the deciding factor as to whether they offer you a loan.
Start using our FREE balance sheet template!
You’ll never be in the dark about your finances with a balance sheet.
This financial statement represents the stability of your business’s finances. The information in the document helps you make better management decisions and informs you of how efficiently your business operates.
We prepared a FREE balance sheet template you can download and use at your convenience.
This is another way we enforce our motto, “No Business Left Behind,” and help your business succeed.