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What a Balance Sheet Reveals About a Small Business

What a Balance Sheet Reveals About a Small Business

By Marco Carbajo, Guest Blogger
Published: June 9, 2015 Updated: June 15, 2015

Do you know what your company is worth?

Understanding your profit and loss statement and cash flow statement only tells a part of the story of a business. Unfortunately many small business owners tend to overlook one of the key measures that shows the overall health of a business – the balance sheet.

The balance sheet is one of the most important financial statements because it shows a “snapshot” of a company’s financial standing. Also known as the statement of financial position, it enables you to see what a business owns and what it owes. In a nutshell, the balance sheet breaks down a company’s assets, liabilities, and owner’s equity at a specific point in time. This helps you as a business owner determine the financial strength and ability of your business.

Ignoring the balance sheet or failing to address any problems uncovered on it may lead to serious challenges for a business. Since the balance sheet is more complete than either the P&L statement or the cash flow statement, it reveals many of the key decisions that impact the overall health of a company. These include, but are not limited to, product and pricing decisions; marketing and sales performance; expenses incurred; etc.

There are three overall sections of a balance sheet: assets, liabilities, and an owner’s equity. Assets are what the business owns. Liabilities are what the business owes now or in the future. The difference between both of these is the owner’s net worth (equity) of the business. This number can either be positive or negative – and if it’s negative, certain steps need to be taken to improve that number as soon as possible.

Ideally, you want the assets of the business to be greater than its liabilities, meaning the business owner’s equity will be positive. What you want to avoid is your company’s liabilities growing faster than its assets. So let’s review each of these sections one by one:

Assets

Assets are broken down into current assets and fixed assets. A company’s current assets are not only its cash, but also its account receivables and inventory. These are the three main items that are listed under a company’s current assets on the balance sheet. However, other assets that can quickly be converted to cash include money market accounts, short-term CDs, etc. Remember, the greater the cash amount the better. The cash number shows how well a business is converting its net revenue into cash. It’s a barometer of how long the company can pay its bills without looking for cash from alternative sources.

Liabilities

Liabilities are listed on the right side of the balance sheet, which shows what the business owes. It’s broken down into current liabilities and long-term liabilities. Current liabilities are basically any of the company’s obligations that need to be paid within 12 months. This can be salaries, accounts payable, loans, credit lines, etc. Long term liabilities are typically mortgages and bonds.

Business Owner’s Equity

What’s left over after the liabilities are subtracted from the assets is the owner’s equity. This section also includes any money that was invested into the business by the owner – also known as an equity investment. Other items that may show up on the owner’s equity section are retained earnings, owner’s draw, and good will.  Goodwill is considered an intangible asset becasue it is not a physical asset like buildlings or equipment. The goodwill account can be found in the assets portion of a company's balance sheet.

The balance sheet is a powerful tool that reveals a lot about the health of a small business that a P&L and cash flow statement do not show. It’s comprehensive and provides a full picture of the business itself.

Know what your company is worth by knowing your balance sheet. It holds the answer.

About the Author:

Marco Carbajo
Marco Carbajo

Guest Blogger

Marco Carbajo is a business credit expert, author, speaker, and founder of the Business Credit Insiders Circle. He is a business credit blogger for Dun and Bradstreet Credibility Corp, the SBA.gov Community, About.com and All Business.com. His articles and blog; Business Credit Blogger.com, have been featured in 'Fox Small Business','American Express Small Business', 'Business Week', 'The Washington Post', 'The New York Times', 'The San Francisco Tribune',‘Alltop’, and ‘Entrepreneur Connect’.