The balance sheet is the primary way to determine how well your company is doing financially. You can also use the balance sheet as a road map to determine where your company is headed in the future. You will need to refer to your company's balance sheet when you prepare your tax return or apply for a loan. It is important to understand what should be included on a balance sheet to ensure that your bottom line figures are correct. You don't want to be in the position of making a decision for your company based on faulty information.
Determining Your Business Assets
Assets represent cash and items of value that are immediately available for your business to use. It can also include money or goods that you are owed on behalf of your business and expect receive within the next year.
There are several different categories of assets, including the following:
The total assets represent all cash and assets that you own on behalf of your business. This includes assets that are owed to your company that you have yet to receive.
A fixed asset is something that you purchase with cash from the business that is expected to last for more than one year. Examples include fixtures and furniture, buildings, land and leasehold equipment. Intangibles include items with a value that is difficult to determine. As a result, these items may never mature into a cash asset. Most business owners deduct intangible assets from their net worth rather than count them as genuine assets. Some examples of intangible assets include organizational expenses, research and development, patents and market research. An intangible asset is similar to a prepaid expense in that its benefit is not immediately known.
The current liabilities of your business are those that will mature and become payable in the next 12 months.
These include the following classifications:
A non-current liability is one that you are obligated to pay in the upcoming year. These include your non-current portion of LTD, contingent liabilities and notes that must be paid to shareholders, officers and other owners. The Small Business Administration (SBA) describes a contingent liability as one that may or may not ever come due. Examples of contingent liabilities include potential lawsuits, guarantees and warranties. They are listed in the footnotes of your balance sheet due to their unknown nature. The total liabilities of your business are the sum of all creditor claims and money that it owes to suppliers, employees and others.
To calculate your current equity in your business, deduct your total liabilities from your total assets. This represents your share in the financing of all assets and is also referred to as your net worth.
When you apply for any type of bank financing, lenders almost always request a copy of your company's income statement. This document is also known as a profit and loss statement. It shows the amount of money your business is expected to earn after all expenses have been accounted for and deducted. A person reading an income statement starts at the top and reads all the way to the bottom to understand expenses and earnings over a specified period of time. However, an income statement should only be taken at face value. It does not reveal legitimate financial problems your business may be experiencing, such as a shortage of cash flow.