The balance sheet includes all the assets and liabilities of a business for a certain date. This is taking a look at what your business owns and owes…hopefully you own more than you owe. However, many start-ups and small businesses go into debt in order to get started or expand their business.
Always make sure the date is accurate when preparing the balance sheet. The balance sheet is like a snapshot in time and should give an exact representation of your business at that date. Let's look at some of the items that go into preparing a balance sheet. Don't worry if some of this doesn't make much sense, it's very common to feel a bit overwhelmed but hopefully this article will make sense of everything. First let's look at the assets, or things that have value that your business owns.
Any asset or valuable item in your business that you can convert to cash within a year. It may include: cash, accounts receivables, inventory, and other items. This is also referred to as a Short-Term Asset. Current assets are those that are easily converted into cash within one year.
Cash and Cash Equivalents- This is any cash, savings, checking, or other quick forms of cash that your business has.
Net Receivables- This is the total amount of money that is owed to your business.
Inventory- This is the value of the total amount of goods that you are ready to sell, have on hand, or are storing. Make sure to only include inventory that is not damaged or that is still relevant for your sales purposes.
Other Current Assets- This is the total of any other assets or valuable item in your business that you can convert to cash within a year.
A useful or valuable thing that is owned in your business that is not easily converted into cash within a year. This is generally property, plant, or equipment. It also may include intangible assets such as the value of a brand name.
These are assets that are not easily converted into cash but still have value.
The next section of the balance sheet focuses on liabilities, which is money that you owe.
Property Plant and Equipment- Add the total value of property, plant, and equipment. These are tangible assets that are used for production, administration, or renting. It may include land, buildings, furniture, machinery, vehicles, etc.
Other Long-Term Assets- Also include the total of any other long-term assets. These are anything that is useful or valuable thing that is owned in your business that is not easily converted into cash within a year. It also may include intangible assets such as the value of a brand name.
This is any debt that is due within a year. It may include payments to pay off a loan or payments for products or materials purchased on credit. Simply stated, this is money or debt that needs to be paid within the next year.
Accounts Payable- This is the amount of money that is owed to others. Include the total amount of accounts payable on the balance sheet.
Short/Current Long-Term Debt- Include the total amount of short/current long term debt. This is the portion of long-term debt that is due this year. This may be a bit confusing at first but don't worry. Basically if you get have a $50,000 dollar loan and you need to pay back $10,000 total this year on the loan, then your short/current long-term debt is $10,000. This means that when you add your long-term debt amount it should only be $40,000. This is because $10,000 is due this year and $40,000 is due sometime after the next year.
Other Current Liabilities- This is any debt that is due within a year. Be sure to include a total of other current liabilities that aren't included in the other categories of accounts payable and short/current long-term debt.
Long term means they are not due within a year… Short-term is within a year. This is money or debt that needs to be paid but not for at least a full year.
Long-term Debt- Long term means they are not due within a year. This is any loan, or debt that your business needs to pay. Include the total long-term debt on the balance sheet. Remember to only include the amount of debt that is due after a year. If you have a $10,000 loan and $2,000 is due this year, then you should show $8,000 as your long-term debt. The $2,000 should be put in the short-term debt section under current liabilities.
Other Long-term Liabilities- Also include the total of any other long-term liabilities. This is anything that is owed but not due until after a year. Most long-term liabilities will be under the long-term debt category so you may not have any "Other Long-Term Liabilities.
Stockholder Equity (Owner's Equity)
This is the difference between your total assets and your total liabilities. It helps to be able to understand what the company is worth according to the book value. This can be found on the balance sheet.
One ratio that is commonly used is the current ratio. It is a measure of liquidity to be able to pay debts or payments due. Liquidity is basically the ability to pay your short term debts with your cash and current assets. It is calculated by Total Current Assets/ Total Current Liabilities. So if some bills need to be paid immediately, it helps look at the health of your business to pay bills. The higher the number the better. A quick example is if you have $10,000 in cash, $5,000 in Inventory, and only a current liability of $5,000 in Accounts Payable then your Current Ratio would be 3. This is good because you have 3 times as much current assets as you do current liabilities. This would be viewed as healthy as it will be easy to pay your bills when due at this moment.
Charts / Tables
Once again, you may choose to include or leave out these charts if you don't believe they are best to include in your business plan.
Cash Forecast Chart- This is the amount of Cash you have access to. It doesn't literally have to be in your business account, but you certainly need to be able to access it relatively quick.
Investment Table- This shows ownership if you have added multiple founders.
This is a great section to include any more details about your balance sheet. Pay special attention to any debts that you already have. Include any loan payment information or depreciation on any of your assets. Depreciation is if you own an asset like machinery, vehicles, or even just a computer. Although it doesn't change the amount of cash you have, depreciation may be used to lower taxes.