Balance sheets are essential documents that help small business owners keep track of all their pertinent financial data. Whether you’ve done them 1,000 times before or have never heard of them, if you’re a small business owner, it’s time to get intimately acquainted with this all-important piece of paper.

What is a balance sheet?

A balance sheet is a statement that includes the following financial information for a small business:

  • Business assets: Including current assets like cash, inventory, and accounts receivable, as well as fixed assets like machinery, furniture, and land
  • Business liabilities: Including current liabilities like accounts payable, interest payables, and taxes, as well as fixed liabilities/long-term debts like bank loans, notes payable to stockholders, etc.
  • Owner equity as of a specific date: Including invested capital and both beginning and current retained earnings

When do I need to make a balance sheet?

Balance sheets are usually created at specific intervals that are determined by the business owner based on the way the business operates and runs its finances and payroll. Common preparation periods include quarterly or annually.

How do I make a balance sheet?

Balance sheets may look different for different companies, but an easy way to create one is to start with two separate columns. On the left-hand side, list the company assets (things to consider are listed above). On the right-hand side, list both the company liabilities and owner equity (also listed above).

Why do I need a balance sheet for my small business?

Besides providing an easy way to keep track of important details, creating a detailed balance sheet helps small businesses get a glimpse at where their strengths and opportunities for improvement are. For example, listing out liabilities as line items in a balance sheet may help small business owners determine where they can cut back on expenses, when necessary.

An accurate balance sheet also helps a small business determine their debt ratio, which provides an overall snapshot of how the company is doing financially. To determine the debt ratio as a percentage, divide the total company liabilities by the total company assets. The larger this percentage is, the more the company has leveraged, or borrowed, to finance their assets. The amount of debt ratio that’s acceptable for a small business is determined by industry. If you’re worried about yours, a corporate accountant can help.

A properly attended balance sheet can also help business owners better understand how their investment is doing from period to period. For example, if the owner’s equity is declining, it may be time to review how the business is operating and where the money is being spent to make some changes. If your small business is a C corporation, you’ll also be required to complete a balance sheet comparing items from the beginning of the year with items at the end of the year as part of your annual federal income tax return. (Businesses with total receipts and assets less than $250,000 at the end of the year are exempt from this rule.)

Who should see my small business balance sheet?

Besides providing essential details for business owners, a balance sheet is a useful document to have in a several other scenarios, as well.

  • For investors: Whether you’re interested in raising funds for your company or selling it, investors will want to look at your balance sheetto determine how the company is doing, financially, and whether it’s worth it to put their dollars behind the company.
  • For lenders: If you’re looking for traditional lenders to help fund your small business rather than individual investors, these fiancial institutions will also consider your balance sheet an essential financial document to consider before loaning to you.

Whether you create a balance sheet yourself, have your business accountant do it, create one from the accounting product you use, or use a template[1], it’s essential to keep up with this information throughout the year.