Small business financial management is a part of business ownership that needs to be prioritized. It's easy for business owners to fall behind on bookkeeping. It usually takes an audit or preparation for a loan to realize you could be doing a better job at bookkeeping.
If you aren't using a balance sheet, it's time to start. The last thing you want to happen is to need an accurate accounting of your business's financial health and come up short.
Plus, you can't know where you are in growth if you're not keeping accurate records. Imagine being audited by the IRS and not having accurate records.
Are you a small business owner wondering what a balance sheet is and how to create one? We have you covered. Keep reading to learn more about balance sheets and how they help with the financial management of your company.
What Is a Balance Sheet for Small Business Financial Management?
A balance sheet is a document you create to track your business assets. The document lists your business assets, the company's liabilities, and any equity the owner has accumulated. The entries are dated for better recordkeeping, so you know your numbers at any given date.
You can prepare your balance sheet at set times. Create a schedule that works for you using quarterly, semi-annual, or annual intervals. If needed, you can also choose to do monthly updates.
The balance sheet format has two columns. The first column is to list the company assets. The second column combines the owner's equity and the business's liabilities.
When you total the owner's equity and liabilities, it should equal the amounts in the assets column.
Types of Assets
Your assets can include the following items:
- Accounts Receivables
- Checking Account
- Petty Cash
- Savings Account
You can also have what is considered noncurrent assets. These include items like the building that houses offices or items like computers. You can also list accumulated depreciation.
Liability and Owner's Equity
In the second column, under liabilities and owner's equity, you would list the following:
- Accounts Payable
- Line of Credit
- Long-term Debt
- Owner's Capital
- Retained Earnings
Long-term debt examples are loans and equipment financing.
Understanding Your Business Debt Ratio
It's essential to your business's financial health to review your balance sheet periodically. You need to know how to read a balance sheet to understand if your debt ratio is good. You always want to compare the amount of debt to your total assets.
To reach the ratio percentage, divide the sum of your liabilities by the total of the assets. Let's say you have assets of $75K, and your debt is $40K. The calculation would be $40,000 ÷ $75,000, and the debt ratio percentage comes out to 53%.
You may believe that you're in good shape as long as the assets cover the liabilities. In theory, this is true. However, you need to maintain balance and keep your liabilities as low as possible. In the business industry, having a high debt ratio is referred to as being heavily leveraged.
A significant financial setback can lead your company into bankruptcy.
Calculating the Owner's Equity
In the simplest terms, people think of the owner's equity as money the owner has invested in the company. This is not 100% accurate. The owner's equity is the amount remaining once all liabilities have been satisfied.
When you incorporate a business, there are different classifications. These classifications determine how the owner's equity is calculated. Let's look at two standard terms.
In businesses listed as corporations, owner's equity is referred to as shareholder equity. The reason is, corporations are structured much differently than LLCs and sole proprietorships. Instead, the conversation turns to stocks and retained earnings.
A sole proprietorship is a standard classification when the conversation turns to small businesses. Investments in the company most likely come from the owner. There are no investors or stocks to get traded.
A sole proprietor can calculate equity by subtracting withdrawals from investments. Therefore, adjustments need to be made if the withdrawals exceed the investment. Adjustments include reduced spending on nonessential items or even laying off an employee.
You always want your equity in the company to increase. It's a sign that the business is profitable.
Meet IRS Requirements
Although being knowledgeable about a balance sheet is a good thing, small businesses don't need one for tax filing purposes. The cut-off for small businesses is $250,000.
If you are running a C-Corporation, the IRS requires you to file a balance sheet with the Standard Form 1120.
Business Loan Process is Easier
Unless your business is turning a great profit and you have a large amount of cash on hand, chances are you'll take out a loan at some point. Small business loans require paperwork that's current and in order.
Knowing what goes on a balance sheet can make the process go smoother. You'll have your numbers documented. Plus, you can show consistency in the company's profitability.
Banks want to help small businesses but are less likely to take a chance on someone who isn't keeping accurate records. Alleviate the stress and prepare for future financial needs by putting emphasis on your small business financial management processes.
How to Create a Balance Sheet
Creating a balance sheet format is not difficult. Most accounting software comes with balance sheet templates as part of its product offerings. You can find balance sheet examples online.
You can also create your own using spreadsheet software like Excel.
Prioritize Your Business Financials Today!
There is no reasonable excuse not to have a small business financial management system in place. Technology makes it easier to keep records of your business activities. If you're too busy or recordkeeping isn't your strength, consider hiring a company that specializes in financial management.
At Uplinq, we offer basic bookkeeping and financial intelligence services. Our software removes the possibility of human error. You'll also receive professional and personal support.
We'd love to offer a demonstration of our product and services. Click here to schedule your demo today!