Preparing a Balance Sheet: The Basics You Need to Know
Often called a “snapshot,” a balance sheet offers a picture of your business finances at a given point in time. Balance sheets take into account assets, liabilities and equity to show whether or not your company is trending toward growth. Along with other financial records, this tool can aid you in making better decisions about your company’s future.
Why Prepare a Balance Sheet?
A balance sheet is one of the many tools you should be using to determine the health of your business. If you want to expand, are wondering if you can afford new equipment or have questions about how well you’re meeting the expectations of shareholders, a balance sheet can give you the answers.
Since preparing a balance sheet requires you to examine both payables and receivables, the process will also alert you to any problems with aging invoices. You might find that you need to restructure the way that you manage incoming and outgoing payments to improve cash flow and restore a strong financial state.
Taking a careful look at all of the figures you collect while preparing your balance sheet can help you establish a more efficient, mindful approach to running your business.
Creating an Effective Balance Sheet
Starting with a template is the easiest way to set up your balance sheet. Spreadsheets provide additional help by using equations that simplify the calculations. Whatever setup you use, your balance sheet should begin with both assets and liabilities.
Assets are broken down into:
• Current assets, including cash, notes receivable, accounts receivable, inventory and payments made in advance
• Long-term assets consisting of land, buildings, equipment, vehicles and fixed assets
Liabilities are divided into the same categories to show:
• Current payables, current payments on long-term debt, taxes owed, lines of credit, payroll and withholdings
• Any payments that are due more than a year in the future, such as mortgages or the balance on a loan
The third element on your balance sheet is your equity in the business and the equity of any shareholders. This is determined by how much you have left over after subtracting liabilities from assets.
Assessing the Balance
Using the total equity amount, you can determine how you stand financially as the owner of your business. Calculate your retained earnings by taking the retained earnings from your last balance sheet, adding your net income for the current period and subtracting anything paid to investors or shareholders. Add this figure to the money you’ve invested in the business, and compare the results to your total assets. Your balance sheet it correct if the two numbers are the same.
A properly prepared balance sheet offers a clear idea of what your company can and can’t support at any given time. This valuable information allows you to run a more profitable operation and steer the business in the direction of continued growth. If the numbers involved confuse you, work with a financial professional to ensure that your final balance sheet is accurate and useful.
Do you want help preparing a balance sheet?
At Verdeja, De Armas & Trujillo, LLC, our team of Miami accountants is dedicated to providing personalized, financial guidance. We provide accurate and comprehensive financial statements as well as in-depth business analyses. Contact us today for a consultation!