Last editedApr 20222 min read
When your business is just starting out, it’s not uncommon to primarily focus on product development and generating leads. Yet using the correct financial statements right from the beginning offers numerous benefits. Here’s a look at how keeping a simple balance sheet for small business can help your start-up thrive.
What is the purpose of a small business balance sheet?
No matter its size, a business’sbalance sheet breaks down the company’s liabilities, assets, and equity.
Assets include any resources generating revenue as well as intangible items like patents and trademarks.
Liabilities include current accounts payable as well as long-term debt like bank loans.
Equity shows the difference between assets and liabilities, or the business’s current value.
By showing a view of these three categories at the end of anaccounting period, owners and investors can gain a greater sense of the business’s financial health. The purpose of a small business balance sheet is to ensure that everything is balanced according to theaccounting equation:
In other words, it lets you know at a glance where your business stands in terms of what it owns, and what it owes.
What are the benefits of a balance sheet?
Here are some core benefits of a balance sheet for small businesses to consider:
1. It offers a scannable list of assets and liabilities for comparison, so you can make sure your business is able to cover its short-term obligations. If liabilities outweigh assets, you need to find ways to increase revenue or drum up working capital from investors.
2. It can be presented to outside investors and lenders as proof of your business’s financial condition. Lenders will want to view the balance sheet to see how much debt your business has and whether you’ve successfully managed liabilities over time. Investors will also want to see the balance sheet to determine risk. It shows how well your business repays debts and collects payments.
3. It can be used for more in-depth financial analysis and forecasting. The basis of many accounting ratios starts with figures on the balance sheet. You can analyse factors like liquidity, productivity, and solvency by comparing assets, liabilities, and equity.
4. It can be used to make business decisions based on facts and figures. You’ll be able to pinpoint trouble spots or issues and correct them before they turn into serious cash flow problems. By regularly updating your balance sheet, you can see if there’s a problem with the budget. Equity should be continually increasing. If it’s not, you can look at the balance sheet to find out where your money’s going.
What are the benefits of balance sheet reconciliation?
One component of keeping a balance sheet is reconciliation. This is the process of going over your balance sheet for accuracy, comparing it to the general ledger to ensure all transactions are recorded in both places. The benefits of balance sheet reconciliation include greater accuracy with your accounts. You won’t be able to accurately analyse your business’s financial statements unless you know they all match.
How to create a simple balance sheet for small business
Creating your first balance sheet might seem like a daunting task if you’re new to accounting, but it’s just a matter of accurately recording all transactions. Gather your details first from the general ledger, spreadsheets, or other records. From there, you can create three categories. Report all company assets in one category and liabilities in the second. Ending balances or equity should be recorded in the third.
While an Excel template can help you get started, as your business grows this can all be quite tedious to complete by hand. Small business accounting software will build the balance sheet for you by automatically filling in all relevant assets and liabilities, often using real-time information from your bank accounts. It will also usually take care of reconciliation to spot any errors early, for a more accurate financial report.
We can help
GoCardless helps you automate payment collection, cutting down on the amount of admin your team needs to deal with when chasing invoices. Find out how GoCardless can help you with ad hoc payments or recurring payments.