To continue our financial series this week, we’re discussing balance sheets. Your balance sheet shows what you own (assets) and what you owe (liabilities) on a specific date. This important financial statement says a lot about your business:
Assets: A balance sheet shows all the assets or what the business owns. This may include land, buildings, equipment, inventory, livestock, and cash. Assets that are either cash or can quickly be turned into cash, such as inventory and accounts receivable, are considered Current Assets. Assets that are more fixed and would take more time to turn into cash are typically listed under Fixed Assets.
Liabilities: A balance sheet shows all debts of the business. The debts are broken out into Current Liabilities (debt that must be paid in the next year) and Long-Term Liabilities (debt with a term longer than a year.)
Equity: A balance sheet shows the equity that the owners have in the business. This is the amount of owner investment plus the net income of the business. The equity should equal the assets of the business minus the liabilities of the business.
Balance sheets must “balance” in that the Assets must equal the Liabilities plus the Equity.
Assets = Liabilities + Equity
Balance sheets reveal the financial health of the business. For example, the Current Ratio (Current Assets divided by Current Liabilities) is often used to examine how well the business can cover its short-term debt payments with its current assets. A current ratio below 1 is a warning sign since that means that the business may not have enough assets in hand to cover its immediate debt needs. The balance sheet can also be measuring the solvency of the business (ability to cover all debts) and the net worth of the business.
Your personal balance sheet will be just as important as a business’s balance sheet when it comes to getting a loan because usually you will be held personally liable for any business debt. For assistance in developing your balance sheet, give us a call at 859-550-3972 or email us at kcard@kcard.info.