What Is A Small Business Balance Sheet?

Balance sheets are an essential component of every small business’s financial success and a key element of accounting. They help small business owners determine when is the best time to make significant company decisions and what the business needs to thrive. It’s important to implement balance sheet building because it’s a key part of a business owner’s financial literacy and long-term success.

What is a balance sheet?

A balance sheet is a financial statement that reports the assets, liabilities, and shareholder equity of a company. It weighs the assets and liabilities of a business in order to determine the shareholder’s equity or the amount that has been invested in the company. The balance sheet structure typically includes two columns, with each column listing the essential components of a balance sheet. One column includes the business’s assets, or owned resources, and the other lists the business’s liabilities or financial obligations. A good balance sheet is typically set up to follow this formula:

Assets = Liabilities + Shareholders’ Equity

Equity is the number of assets that you have which may have liabilities attached to them. It is paramount that small businesses calculate their equity to understand their financial position. When a business’s equity is positive, they own more assets than liabilities, making its financial situation brighter. On the contrary, when a business’s equity is negative, a business owner must reevaluate their business strategy and assess how they will approach their business differently and make adjustments.

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How does a small business report assets?

There are two different types of assets that a small business may report on a balance sheet. The first type is current assets, which are valuables that are expected to be converted into cash within the next year. Some examples of current assets are inventory, cash, and accounts receivable. Small business owners are likely to find that these assets create significant changes to their financial position from quarter to quarter as they are frequently changing.

The second type is non-current assets. These are still assets, but their conversion rate is much slower than current assets. They are expected to convert into cash over a longer period of time. Some examples of non-current assets include investments, land, and intellectual property. While these assets are just as valuable, their costs are often spread over a long period of time and will affect the business’s finances at a much slower rate.

How does a small business report liabilities?

There are two different types of liabilities that a business may have to an external entity. The first is a current liability, which are debts or dues owed to an entity within one year. These obligations may include short-term debt, income taxes, and employee payroll. These liabilities are at the forefront of a business’s attention because they must be paid off shortly.

The second type is non-current liabilities. These long-term financial obligations may stretch over several years, meaning that a small business may not have to pay them off shortly in the future. This may include long-term debt, pension benefits, and bonds payable. It is expected that these non-current liabilities will be settled in a longer period of time to accounts payable.

How can balance sheets benefit small businesses?

A balance sheet for small businesses allows owners to make better decisions and determine what the company needs to thrive based on their book value, which is the net asset value of the business. Many owners use balance sheets to assess when the right time is to make new, and potentially risky decisions such as hiring new employees or making a large transaction. These decisions might be costly and detrimental if made at the wrong time, but a good balance sheet confirms how solid a business’s financial condition is.

Balance sheets also help small business owners spot strengths and weaknesses in the company. If your return on investment (ROI) is unexpectedly low, there may be several factors that are inhibiting your business growth listed in your financial statement. You might find that certain assets are not being used as efficiently as you thought, or that they are not as valuable as expected outright. The elements of a balance sheet allows you to see these finer details within your business’s financial position that otherwise would have been missed.

Finally, a balance sheet for small businesses can assist businesses in being approved for loans or being attractive to potential buyers. The ability to receive a loan is often determined by the success of a business because lenders expect the business to be financially fit enough to make payment deadlines. It’s always a good idea to be prepared for a potential lender or buyer to request several previous balance sheets.

When should a business report a balance sheet to the IRS?

How your business is labeled determines whether you have to report your balance sheet to the IRS. Only C corporations have to submit their balance sheet for federal income tax purposes. C corporations are defined as corporations where the business entity is taxed separately from the owners. In addition, only businesses with a net income of $250,000 or more per year are required to send the IRS their balance sheet, along with their corporate income tax return.

How does a small business start a balance sheet?

Building a good balance sheet isn’t difficult, but it can be a challenge to deduce what your business needs from its gathered information. The first step of creating a balance sheet is to keep track of all the business expenses, revenue, fees, and other entities throughout the last three months. A structured balance sheet should be made every quarter to accurately reflect the current financial growth or limitations of the business.

In addition, financial advisors can assist you in fleshing out your business’s strengths and weaknesses down to the smallest details. In addition, if your balance sheet is not balancing, financial advisors are quick on their feet to identify calculation errors. Advisors are able to accurately crunch the numbers to determine your business’s financial status and guide you through effective decision-making that will expand your business and avoid business losses.

Virtual Financial Officer is here to help you reach your financial goals and feel confident in your fiscal decisions. Contact us today to learn more about our online accounting, bookkeeping, and fractional CFO services for small businesses and start-ups.