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- A balance sheet consists of assets, liabilities, and owners’ equity. The key formula to remember for balance sheets is Assets = Liabilities + Owner's Equity.
- Balance sheets are helpful to review the financial strengths, weaknesses, and potential opportunities for a business.
- Assets in a balance sheet are resources owned by your startup that have an economic value associated to them and will yield a future benefit.
- Liabilities in a balance sheet represent debts of a startup to fund various business operations.
- Owner’s equity in a balance sheet represents the company's assets that can be claimed by owners or shareholders once the company's debts are paid off.
- The most common current assets for startup businesses include cash, inventory, prepaid expenses, and accounts receivable.
- Startup businesses can incur short-term or long-term liabilities.
- Startup businesses use balance sheets to make strategic decisions.
- Balancing assets and liabilities is the key to check the financial position of a startup business.
If you’re ready to revolutionize the market with a unique business idea and marketing strategy, creating and reading a balance sheet should be on top of your priorities. In fact, before you reap the benefits from your business idea, you will have to learn to make financial statements.
Fundamentally, you should view balance sheets as a way to court investors and present an optimistic financial view of your startup. The complicated structure and mathematical overlaps of a balance sheet might overwhelm you.
On the surface, a balance sheet serves as the source to assess the financial capabilities and strengths of the startup business. But you can also take advantage of the balance sheet to analyze financial trends. Whether it's your approach to collect receivables or track debt management, a balance sheet is a comprehensive document that paints a clear picture of your startup.
Despite your reservations and fears, creating a balance sheet is not as hard as it looks. Fortunately, there are more than enough available online resources that can help you make an errorless balance sheet for your startup business.
What is a balance sheet?
In layman’s terms, a balance sheet is a financial statement that highlights what a startup business owes and owns in the form of assets and liabilities. A balance sheet also shows the owner’s equity which represents the total assets of a business that can be claimed by owners.
Importance of the Balance Sheet for a Startup Business
Since the inception of capitalism, a balance sheet has been an essential document that helps you understand the finances of a business at a particular point in time. Part of the charm of a balance sheet is that you can compare what you owe and own.
It is vital to remember that the balance sheet represents information for a particular point in time. Conversely, the cash flow and income statement can cover and showcase the information for the entire fiscal year or period. Today, a balance sheet serves as a crucial financial puzzle in every startup business.
Balance Sheet Types
Classified Balance Sheet
It is the most used type of balance sheet. It divides the information or accounts into subcategories. This type of balance sheet is easier to structure, maintain, and compare.
Unclassified Balance Sheet
In an unclassified balance sheet, you have to list rather than categorize items. You have to list assets first and then liabilities.
This type of balance sheet makes more sense when you have to list a few items. You have to list assets in accordance with liquidity and note fixed assets at the lower bottom and cash assets at the top of the balance sheet.
Interim balance sheet
You can use this type of balance sheet to summarize periodic accounts rather than entire accounts of the fiscal year. Interim balance sheets work if you want to produce monthly or quarterly reports.
Comparative Balance Sheet
As the title suggests, this balance sheet helps compare balances of various accounts at different periodic accountings. It is useful when you want to review the overall position of the startup over time periods.
Components of a Balance Sheet
Although there are numerous categories and subcategories of accounts, you can break down a balance sheet into three main components:
It refers to the items you own in the startup business, such as accounts receivables, plants, equipment, property, vehicles, and cash reserves.
These are debts your startup business is liable to pay back to people or businesses. It can include outstanding supplier bills and unpaid loan payments.
It refers to the total investment in a startup business and additionally earned income over a period.
Formula of a Balance Sheet
The total assets in a balance sheet must equal total liabilities + total owners equity. This balance must be maintained whenever you make a balance sheet.
Uses of a Balance Sheet for a Startup Business
A balance sheet lends a hand to startup founders to stay on top of their business’ financial strength. It grants you the ability to conduct business activities with more confidence. In fact, you cannot perform accounting tasks without your balance sheet
In the competitive financial world, balance sheets make it possible for startup founders to determine and analyze business trends in the form of accounts payable and receivable. For instance, you can decide whether or not you can collect receivables with a more aggressive approach. Similarly, you can establish whether a particular debt is uncollectible.
You cannot expect to get backing from vendors, investors, or banks without robust balance sheets. Whether you formulate your startup as a partnership, LLC, or corporation, the role of a balance sheet (and income statement) is at the center to conduct and maintain business operations.
Why do you need to create a balance sheet?
It doesn’t matter how future proof your business ideas may be; you cannot realize those ideas without paying close attention to your balance sheet. Your balance sheet is a vital part of the financial statement. It reveals the internal and external insights to key stakeholders of the startup and potential investors.
One of the main reasons to learn to create a balance sheet is to make reliable business decisions. In fact, without consistent balance sheets, you won’t be able to make calculated decisions.
When you have a clear understanding of your startup business’ financial health at a specific period, you can make good estimates about future projections. In time, it becomes a basis for founders to make smart business decisions.
Get Advances and Loans
Balance sheets are used to request advances and loans from banks. Without balanced assets and liabilities, you can’t expect to get urgent loans or funds from financial institutes.
Usually, banks calculate your debt-to-equity ratio to decide whether or not to extend additional funds or loans to your startup business. It serves as a safe judgment call that thwarts risks in advance.
Connect the Dots
If you have a balance sheet that spans multiple accounting periods, you can pinpoint key trends and patterns in the balance sheet.
For instance, if you notice your long-term debts rising or your accounts receivables rising, it may be time to review your business' strategy to fix any sticky points.
Brief Financial Position
You can check your current assets and current liabilities to form a clear understanding of the short-term health of your startup business.
Practically, you should have plenty of short-term funds to take care of your short-term liabilities, such as supplier payments and operating expenses.
How should you start?
Follow the Standard Format
Your balance sheet’s asset and liability side should be structured. The basis of this structure, however, depends on your current assets and liabilities.
Typically, you have to record liquid assets like inventory and cash on top of a balance sheet. On the other hand, you have to record non-liquid assets such as machinery, building, and land at the bottom of a balance sheet.
Similarly, you have to record short-term liabilities like loans, advances, and creditors on top of a balance sheet. Conversely, you have to note down the long-term liabilities at the bottom of a balance sheet.
Seek the Guidance of an Expert Accountant
As a founder, you should not be reluctant to seek the expertise of a professional and experienced accountant to draft flawless balance sheets.
In fact, most startups now prefer to outsource their accounting and bookkeeping services to expert accountants. You can even receive valuable recommendations to drive business growth and ensure the financial security of your balance sheet.
Learn to Read YOUR Balance Sheet
You can’t make a balance sheet without understanding the contextual significance of your assets and liabilities. In fact, the last thing you want to do is generalize the information on your balance sheet.
If you have a finance background, you probably know how to read a balance sheet. But if you’re new to balance sheets, take one step at a time and learn to read the specific financial entries. Make it a priority because the periodic assessment of a balance sheet will help you understand your business better.
Make your startup's first balance sheet
Typically, businesses perform these calculations at the end of the month, quarter, or year. A balance sheet provides a snapshot in time view of your business unlike the income statement or cashflow statement that cover changes within a time period.
Let’s take a look at the three stages and steps you can use to create a balance sheet for your startup business:
Step 1 | Assets
Go in the order: Current Assets ⇒ Long-term assets ⇒ Total Assets
First, start listing your current assets and liabilities. You can include items such as prepaid expenses, inventory, and cash. Now, make sure to list the items in descending order with respect to liquidity.
At this point, you can include accounts receivable as an asset. This depends on if your customers owe money to you. A good example of this is if you offer net payment terms of 30, 60, or 90 days to your customers to pay your invoices. These pending revenue amounts would be classified under Accounts Receivables.
Second, you can move on to your long-term assets that include purchased equipment, vehicles, or property.
Third, don’t forget to list intangible items. These annual non-monetary assets can include a trademark, patent, or copyright. Lastly, finalize and calculate the asset portion by adding your total current, fixed, and non-monetary assets.
Step 2 | Liabilities
Go in the order: Current liabilities ⇒ fixed liabilities
Now it is time to calculate the items on the right side of your balance sheet. First, list down all your current liabilities like accounts payable and business credit card payments.
Second, list down all your long-term liabilities on the same side of the balance sheet. You can include items such as mortgages and notes payable.
Third, if you think you’ve managed to add all current and fixed liabilities, add up and you will get total liabilities.
Step 3 | Owner’s Equity
Your last priority should be to calculate the owner’s equity. In short, it refers to the total value of your company's assets that can be claimed by the company's owners or shareholders.
Owner's equity is calculated by summing your business assets (including inventory, accounts receivables, retained earnings, etc.) and deducting all liabilities (such as wages, debts, loans, etc.). Here's an example calculation of Owner's Equity.
The key components within Owner's Equity are:
- Retained earnings - net income that's left over after paying out your shareholders
- Outstanding shares - outstanding stock that is blocked or purchased by shareholders of the company, excluding Treasury Stock
- Treasury Stock - Stock that's owned by the company itself.
- Additional paid-in capital - refers to money paid by an investor that's beyond the par value of the stock. Typically, this happens when investors purchase the newly issued stock directly from the company during an IPO.
Here's a template you can use to format your balance sheet:
Templates & Guides
- Harvard Business School's guide to Balance Sheets for beginners
- Downloadable excel templates for financial statements including Balance Sheets
- Balance sheet templates specific to SaaS startups
Learn more with us
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- Learn more about accounting for startups
Access more guides in our Knowledge Base for Startups
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