Wednesday, May 20, 2015

Balance Sheet – Does it Matter to a Business?

The one of three forms a business owner often does not understand is a balance sheet. This form is one of the best methods for an owner to see the financial health of the business and possibly start to see where to improve the business.

The balance sheet is divided into three parts – assets, liabilities, and equity. An asset is something a business owns or has value like cash, equipment, inventory and investments. When completing a balance sheet, do not forget to include items you may not have complete ownership of like the building, a leased car etc. 

There are two types of assets – current and non-current. A current asset can be turned into cash quickly (usually within one year) like cash, accounts receivable and inventory. A business owner would not normally expect to keep owed amounts or inventory past this one year time frame. A non-current asset is the opposite – it is not expected to be turned into cash quickly and include items like fixed assets (land, facilities, equipment and cars). These assets tend to be used in creating sales for the business.

The second part of the balance sheet is the liabilities. This is where the business reports what it owes to other people or businesses. Another name for these items is accounts payable. Again, this section is divided into current and non-current liabilities under the same requirements as assets. Current liabilities are items that can be paid off within a year and non-current are items longer than a year.

The final section is equity, and shows how much the business is worth to the owner(s). It should be the difference between assets minus liabilities. This section can be either positive or negative depending on what is happening within the business. If there is a decision to expand operations, then this section may be in the red due to increased expenses. If there was a significant increase in sales, the owner may decide to keep money in the business for future use and it would be in the black.

The one thing a balance sheet does not show is how profitable a business is. This is reported on the income statement (a form we will talk about in another column).

As a business owner, the balance sheet helps to provide a snapshot of the health of the business at a given moment, and is an aid in deciding on future plans for the business. If there are questions about a balance sheet or any part of your business, feel free to contact me, Richard Proffer, at the University of Missouri Extension Small Business Technology Development Center at 573-243-3581.