Welcome to Commerce Sync’s new guest blog series. “That’s a Really Good Question” will focus on the accounting, marketing, human resources and general questions you’ll ask most as a small business owner. We’ve gathered a varied group of industry pros to share their answers and expertise with you. This week our focus is on the basics of reading and using a balance sheet.
Most small business owners would rather spend time at the dentist than talking with an accountant! I’m not sure if that’s a true statistic, but after working as a CPA for 15+ years, I can tell you that it feels true.
One of the things that often trips up my clients? The balance sheet. It can look a little intimidating but once you understand what it is and how you can use it to keep track of your business growth, you’ll appreciate it for the powerful insights it can provide
What’s a balance sheet?
A balance sheet is a snapshot of your company’s financial position. It shows what you own (assets) and what you owe (liabilities) at a single point in time — like at the end of the month, the end of a quarter, or the end of the year.
The difference between your assets and your liabilities shows you how much value your business has and the amount that belongs to you and any other owners.
- How can I use a balance sheet? List your current assets (anything that can be converted into cash within the next 12 months), usually: cash in the bank, accounts receivable and inventory.
- Also list your fixed assets (anything that will be around for more than 12 months), usually: vehicles, equipment, buildings.
- Now, list your current liabilities (due within the next 12 months), usually: accounts payable, taxes and loans.
- Also, list any long-term liabilities, such as mortgages where payment is due in more than 12 months.
- Add up all your assets and your liabilities and compare the two. Ideally, your assets will be worth more than your liabilities.
Bonus tip: Divide your current assets by your current liabilities to get your financial ratio. If the number is higher than one, it means you have the financial resources to pay your current bills, and is an indicator of good financial health.
Here's an example of a simplified balance sheet for a small business on August 1:
Source: Martin Brown and Yoder, Inc. Certified Public Accountants