Tag: financial statements

Know Your Financial Statements: Understanding the Balance Sheet

Many small business owners find financial statements intimidating, but they don’t have to be. Understanding your financial statements is key to managing your business’s health and growth. In this blog post, we’ll break down the balance sheet—one of the most essential financial statements you need to know.

By the end, you’ll have a clearer understanding of how your business’s assets, liabilities, and equity come together to tell the story of your company’s financial health.

What Is a Balance Sheet?

A balance sheet provides a snapshot of your business’s financial position at a specific point in time. It outlines three core components:

  • Assets: What your business owns
  • Liabilities: What your business owes
  • Equity: The owner’s stake in the business

The fundamental equation behind a balance sheet is:

Assets = Liabilities + Equity

This equation shows that all assets are financed either by the owner’s investment, debt (liabilities), or retained earnings (profits that remain in the business).

Assets: What Your Business Owns

Assets are the resources your business owns or is owed. They can be divided into two main categories: Current Assets and Fixed Assets.

Current Assets

These are assets that can be converted into cash or used within one year. They include:

  • Cash: Money in bank accounts and on-hand
  • Accounts Receivable: Money owed to the business, typically due within a year (e.g., unpaid customer invoices, credit card balances)
  • Inventory: Goods held for sale or used in production

Inventory Valuation Tip: Inventory can fluctuate in value over time. A common method is the FIFO (First In, First Out) method, where older inventory is sold first. This helps ensure the most recent purchases are valued accurately.

Fixed Assets

Fixed assets are long-term investments that have a stable value and are expected to last for more than one year. These include:

  • Furniture, fixtures, and equipment
  • Property and real estate
  • Vehicles

Depreciation: Fixed assets lose value over time due to wear and tear. Your accountant will help determine the most beneficial depreciation method for your business, as set by the IRS.

Liabilities: What Your Business Owes

Liabilities represent debts your business is obligated to pay. These are also categorized into two types: Current Liabilities and Long-Term Liabilities.

Current Liabilities

These are debts that need to be paid off within a year, including:

  • Accounts Payable: Money owed to suppliers for purchases made on credit
  • Accrued Expenses: Unpaid expenses like utilities and payroll
  • Short-Term Loans: Loans due within the next 12 months
  • Taxes Payable: Unpaid taxes, such as sales tax or payroll taxes

Long-Term Liabilities

These are debts that won’t be paid off within the next year, including:

  • Bank loans
  • Mortgages

Equity: The Owner’s Investment and Retained Earnings

Equity represents the value of the owner’s investment in the business. It shows how much of the company’s assets belong to the owner after liabilities are subtracted.

Owner Investment vs. Retained Earnings

  • Owner Investment: Money the owner invests to fund the business’s start-up or operations (also known as Owner’s Injection).
  • Retained Earnings: Profits that are kept in the business rather than taken out by the owner for personal use. These earnings are used to fuel growth and expansion.

If your business is incorporated, the value of the owner’s investment is shown through stock shares issued to the owner. For sole proprietors or LLCs, the investment is recorded directly as part of the business’s equity.

How to Create a Balance Sheet for Your Business

To create your own balance sheet, start by listing all your assets and liabilities. Here’s a simple balance sheet template you can use:

Balance Sheet 
Company Name 
  
 2025
Assets: 
  Cash 
  Account Receivable 
  Furnishing 
  Equipment 
 Net Fixed Assets 
Total Assets $                 –  
  
Liabilities and Equity: 
  Accounts Payable 
  Notes Payable 
  Long-term Debt 
Total Liabilities                    –  
  Owner’s Injection 
  Retained Earnings 
Total Equity                    –  
  
Total Liabilities + Equity  $                 –  

If you’d like a changeable balance sheet template, feel free to email me at susan.ball5@aol.com, and I’ll send it your way!

Final Thoughts: Why the Balance Sheet Matters for Your Small Business

Your balance sheet is more than just a snapshot of your business at a specific point in time. It’s a valuable tool that helps you:

  • Understand the financial health of your business
  • Track your growth and plan for future investments
  • Make informed decisions about spending, borrowing, and retaining earnings

By regularly reviewing your balance sheet, you’ll be better equipped to manage your finances and maximize your profits. Have questions about your business’s balance sheet? Or need help understanding your financial statements better? Drop your questions in the comments below, and I’ll get back to you as soon as possible.