Small Business Owner’s Primer- Understanding the Balance Sheet

Demystifying the balance sheet and its components.

 

The balance sheet is a crucial tool in your company’s financial management. By looking at your balance sheet, you are able to see a snapshot of your company’s finances at a single point in time.

The balance sheet highlights:

  • What you own (assets)
  • What you owe (liabilities)
  • Your net worth (assets minus liabilities)
  • The simple formula is: Assets minus Liabilities equals Owner’s Equity or Net Worth.

Assets include:

  • Current or short-term assets – These include those assets that will be used up or changed into cash within a year. In this category, you can include assets such as cash, accounts receivable, prepaid expenses and inventory.
  • Fixed assets – These include assets for long-term use. In this category, you can include assets such as buildings and equipment.

Liabilities include:

1.  Debt (money owed to others)

a) Current or short-term debt (such as lines of credit) is expected to be paid off within a year.

b) Long-term debt (such as mortgages or loans) will take more than one year to pay off.

2.  Owner’s equity or net worth (the proportion of asset value that represents money invested by the business owner/s).

Next- 5 common financial ratios small business owners need to know