When you’re growing a business, there’s so much to think about. Winning contracts, hiring staff, exceeding customer expectations, buying equipment, and advertising your services. So, it’s little surprise that so many small businesses don’t keep an accurate balance sheet.
Unfortunately, failure to keep on top of your finances can be fatal. Looking at the stats from Fits Small Business below, one jumps out: 29% of small businesses fail because they ran out of capital. Furthermore, only 40% of small businesses are profitable, while 30% break even and 30% are losing money.
How can you avoid running out of capital, and keep your business profitable?
By keeping an eye on your small business balance sheet — and making sure the format you’re using is designed to give you the most critical information.
In this article, we’ll look at balance sheets for small businesses, why you need to keep them, and some tips to get you started. We’ve also created a free balance sheet template to download so you can start implementing what you’ve learned right away.
Sign up to get the template emailed right to you. In the meantime, let’s look at why balance sheets are crucial for your business.
What is a balance sheet?
Put simply, your balance sheet shows a “snapshot” of your company’s financial standing. It’s also known as the statement of financial position. It’s key because it shows, at a glance, what you owe and what you own. It breaks down your business profitability.
Your balance sheet itemizes your assets, liabilities, and your own equity. It’s important because it shows you how strong and resilient your business is at any given time. Whether it can withstand a loss and whether you should be spending or saving.
When it comes time to make a financial decision such as whether to buy new equipment or hire more staff, your balance sheet should play a role in the process.
A balance sheet also allows people outside your company to quickly understand its financial condition. This is crucial for lenders who will certainly require a balance sheet to determine your business’s financial health and creditworthiness.
Potential investors will also use a balance sheet to understand where their funding will go and when they can expect to be repaid. A good track record of managing your assets and liabilities indicates to creditors and investors that you will be a good business to work with.
Why do I need a balance sheet?
If you’re in business to make money and not just because you love working (😊) your balance sheet is your friend. Ignoring it or failing to analyze it correctly can be the death of your business as your expenses pile up.
In a less extreme case, it can lead to financial losses that you will be unaware of. Small businesses will always have rainy days, and a good business maintains a minimum cash reserve for rainy day protection.
A mix of historical analysis and future focus on your balance sheet will assist your business in achieving long term success. For this reason, it’s important not to wait until year-end to analyze your business finances.
I reached out to Antonis Hannas, owner of leading data and market analysis company QAnalysis for his thoughts.
“For us, a balance sheet is critical. Absolutely critical.
Of course, primarily, we use it to assess the current financial health of our company. This is fundamental. But more so, we use it for forecasting, risk analysis and planning for the future.
I usually look at historical data going back at least 18 months. I can then take an average of those metrics and pull it forward, factoring in current circumstances and potential future risks.
Of course, you will need input from other divisions of your company to be completely accurate. What are your company’s sales figures and prospects? Is your marketing team planning to launch a new product? Will you be hiring more staff?
If you look at the company historically, you can see clear trends. These will help you to accurately plan and implement growth strategies.
My main tip for small businesses is to keep on top of your balance sheet. That means updating it regularly and knowing how to analyze it. I think if you’re new to business, then it’s worth watching some tutorials to understand how to do this. Overall, a strong balance sheet will make you more agile and shape a more profitable future for your business.”
Small business financial pitfalls to avoid
In a perfect world, you would have all of your financial data at your fingertips, ready to help you make the best decision for your business.
Here are some common challenges to avoid when it comes to managing your finances.
#1. Not projecting the future
As Antonis pointed out above, failure to project can leave small businesses floundering. Every department in your organization relies on knowing the budget for future operations, and much of this stems from your balance sheet.
Human Resources need to know whether to hire. Marketing needs to know how much they can spend on campaigns and events while your sales department will need to know if they have a budget for expos or trips.
If you don’t work on projections, one of two scenarios will occur. All your departments will blindly spend, and you will run into financial difficulty. Or nobody will spend anything and there will be no growth.
#2. Not being aware
Many small businesses hire an accountant to manage their finances, which is one of the most popular services a business can outsource. For good reason.
However, an owner who is not savvy about the balance sheet is essentially leaving the business in someone else’s hands. This is not to imply financial wrongdoing; however, it is to emphasize that small business owners should remain in control.
You should know if there is a financial anomaly or something doesn’t look right on your balance sheet. If you have an accountant, you should schedule regular meetings to discuss the financial health of your business. Being involved with your business on a deeper level can also make you a better entrepreneur and inspire more informed business decisions.
#3. Not being compliant
There are many circumstances, none of which are positive, that could occur if your small business leaves a balance sheet out of its financial statements. From an accounting standpoint, a balance sheet is central to the quartet of reports that GAAP (Generally accepted accounting principles) and IFRS (International Financial Reporting Standards) recommend.
For good accounting purposes, it’s best to have a balance sheet up-to-date in order to safeguard against future problems.
Glossary of finance terms every business owner should know
When we started our agency, I tended to shy away from complicated terms. I’m a content marketing person, not an accountant, so I can hire someone to do that, right?
This sentiment is quite common, but it’s dangerous. You need to be in control of your business and that means knowing what’s going on with your finances, from business invoicing to payroll fees. Here are some basic accounting terms you should learn or brush up on if it’s been awhile.
Accounts Payable (A/P) – This is your unpaid supplier invoices and bills (money owed by the business to other businesses). Once a bill is paid, it is removed from this category.
Accounts Receivable (A/R) – These are your unpaid sales invoices (money owed to the business by customers). They are found on the balance sheet as an asset. Once the customer pays their invoice it is removed from this category.
Working Capital – Your working capital is the cash available for day-to-day operations within your company. The amount of available working capital is a measure of your ability to meet short-term obligations and keep your company running smoothly. Good working capital management also improves your ability to qualify for bank loans and favourable credit terms. There are four main sources of working capital.
- Net income
- Long-term loans
- Sale of capital assets
- Injection of funds by stockholders
Assets – These are the items of value owned by your business. For example, cash in your bank account, petty cash, accounts receivable and non-currency assets like land, equipment, vehicles, and buildings. Cash, referred to as ‘business oxygen’, is the most evidential sign of a strong balance sheet. You need cash to pay employees, contractors and a host of other expenses.
Liabilities – Your liabilities are the accounts payable, accrued liabilities, taxes payable, customer prepayments, short-term, and long-term debt.
Shareholders’ Equity – This is the stock, additional paid-in capital, retained earnings, and treasury stock for your company. You may need to report on this for shareholder or investor meetings.
Tools for managing your balance sheet and business finances
Today, small businesses are lucky enough to have a range of online accounting tools at their disposal. These can simplify and help you to manage your accounts. Here are a few of the best:
You can use QuickBooks to accept business payments, manage and pay bills, and execute payroll functions. It also gives you simple and colorful snapshots of accounting activity, highlighting important areas like overdue invoices.
Hubstaff allows businesses to accurately track work hours for their entire team, expenses, invoices, and team payments. Best of all, it integrates with Quickbooks, FreshBooks, Payoneer, Transferwise, and Bitwage, therefore streamlining your operations. This app allows you to build project budgets and set weekly limits so you never go over budget.
3. Zoho Books
Zoho is not just a great marketing dashboard, it’s also an easy accounting software that manages your finances, gets you tax-ready and streamlines interdepartmental communication. Like Hubstaff and QuickBooks, Zoho is colorful, responsive and easy to use.
Small business financial resources
Taking control of your business finances is a large topic and one that small business owners will want to delve into much more. Here are some great resources to further your expertise.
Article – The Business Owner’s Guide to Balance Sheets
Article – How To Create A Balance Sheet For Your Business
Article – What Small Business Owners Need To Know About Balance Sheets
Video – Kane Hooper – Understanding the Balance Sheet
Video – Jacob Clifford – Bank Balance Sheets Practice
Video – Financial Education – How To Read A Balance Sheet
Podcast – Intro To Balance Sheets
Podcast – Investing For Beginners – Reading A Balance Sheet
What does the future hold for your business finances?
I hope that this short guide has inspired you to work on your balance sheet or perhaps spend more time learning about them. The great news is that by utilizing free balance sheet templates like this one, you can get started immediately. Comment below or tweet us to tell us how you’re getting on!