You’ll need a balance sheet if you’d like to attract investors to your startup. You may also need one if you’re in the market for a business loan. However, balance sheets aren’t simply a tool that can help your business get funding. Once you know how to read a balance sheet, you can use yours to gauge your startup’s financial health and figure out how to improve it.
All startups should have these financial statements, even if they’re only used internally. Continue reading to learn how to make a balance sheet and how it can be used to improve your startup’s finances.
What Is A Balance Sheet?
A balance sheet is a basic financial statement that provides a view of a company’s financial situation at a specific point in time.
These statements are often confused with income statements or income sheets. However, when you perform a balance sheet vs income statement comparison, you’ll find income statements provide an overview of financial performance over time, while balance sheets provide a snapshot of a company’s financial status on a specific date.
When you create your balance sheet, you’ll compare your assets and liabilities. In doing so, you’ll learn about your company’s ability to cover the cost of its liabilities using the assets it has on hand.
The Importance Of A Balance Sheet In Your Startup
Balance sheets are a necessary tool, especially if you’re interested in attracting outside capital for your startup. However, that isn’t the only reason you should build one. Some other reasons these financial statements are important include:
- Financial Position Assessment: The typical balance sheet format makes it easy to use various financial ratios to assess the financial position of your company.
- Performance Evaluation: You can use balance sheets from different periods to evaluate your company's overall performance.
- Cash Flow Management: The detailed asset and liability data on your balance sheet provides visibility into the cash that’s flowing in and out of your business.
- Enhanced Debt and Liability Management: Use the information on your balance sheet to make educated decisions as you take on and manage debt and other liabilities.
- Compliance: An accurate balance sheet helps to make sure your statements are prepared using generally accepted accounting principles (GAAP).
Components Of A Balance Sheet
The key components of a balance sheet are your business assets, liabilities, and equity. Learn more about these below.
Business Assets
On a balance sheet, assets are divided into two sections – current assets and long-term fixed assets. Current assets are those you can turn into cash in 12 months or less. Long-term fixed assets would take more than a year to turn into cash. Fixed assets often include intangible assets like brand names and trademarks, as well as assets like common stock and real estate.
Liabilities
Liabilities can also be current liabilities like accounts payable or long-term liabilities like bonds payable and mortgage loans.
As you develop your balance sheet, it’s important to consider your tax liabilities as well. All taxes due within 12 months are considered current liabilities, while taxes due in more than 12 months are considered long-term liabilities.
Equity
Equity is a measure of the value of ownership in your startup. This is the amount of funds you and other owners have invested directly or money retained from company earnings. You can calculate equity by subtracting your total liabilities from your total assets.
This figure gives you an idea of the net worth of your business. It’s the total amount of money all owners would be paid if you decided to liquidate the business.
A basic accounting equation known as the balance sheet equation further outlines the relationships between assets, liabilities, and equity.
That equation is as follows: Total Assets = Total Liabilities + Total Equity
4 Steps To Create A Balance Sheet
Follow the steps below to develop a balance sheet for your startup.
Gather Financial Information
Start by gathering all financial information relevant to your business. This includes all statement balances as well as accounts receivable and accounts payable. As you gather your financial details, be sure to locate your tax information as well.
Organize Current Assets And Liability Totals
Now it’s time to organize your data. Start by separating your current assets and liabilities from your long-term assets and liabilities, as these are typically separate line items on the balance sheet. Then, follow these steps:
- Add all of your current assets together
- Add all of your long-term assets together
- Add all of your current liabilities together
- Add all of your long-term liabilities together
With this data, you know your total current and long-term assets as well as debt and liabilities. You can add your current and long-term assets together to determine your total assets. You can also add your current and long-term liabilities together to determine your total liabilities.
Calculate Equity Ratio
Determine your startup’s equity ratio by dividing the total shareholders’ equity by the total value of assets in the company. This ratio tells you what percentage of the company is funded by stakeholders and what percentage is funded by debt. The closer this ratio is to 100%, the better for the company and its stakeholders.
Prepare The Balance Sheet
Use a balance sheet template and the data you’ve collected to build out your balance sheet. If you’ve organized your asset and liability totals properly, this should be as easy as copying and pasting the data from one document to another.
Once you’ve ported all data over to your new balance sheet, it’s time to print out and review your balance sheet report. From here, you can use the data to further assess and improve your startup’s financial position, evaluate performance, and manage cash flow.
Take Action And Drive Financial Success For Your Startup
As you build your balance sheet, you’ll begin to dive deep into your company’s financial data. This will show you what you’re doing right and help you spot opportunities for improvement. Moreover, if you’re interested in attracting investors, you’ll likely need a balance sheet at your fingertips.
Why wait? Start working on your balance sheet now to drive financial success for your startup. Also, consider other financial documents, like cash flow statements and income statements, to get the full financial picture of your company. You can even harness the power of artificial intelligence to simplify and speed up the process.
your business in our interactive demo!
.png)
