business plan balance sheet definition

What Is a Balance Sheet? Definition, Formulas, and Example

Trevor Betenson

10 min. read

Updated May 2, 2024

Business financial statements consist of three main components: the income statement , statement of cash flows , and balance sheet. The balance sheet is often the most misunderstood of these components—but also extremely beneficial if you understand how to use it.

Check out our free downloadable Balance Sheet Template for more, and keep reading to learn the different elements of a balance sheet, and why they matter.

• What is a balance sheet?

The balance sheet provides a snapshot of the overall financial condition of your company at a specific point in time. It lists all of the company’s assets, liabilities, and owner’s equity in one simple document.

A balance sheet always has to balance—hence the name. Assets are on one side of the equation, and liabilities plus owner’s equity are on the other side.

Assets = Liabilities + Equity

• What is the purpose of the balance sheet?

Put simply, a balance sheet shows what a company owns (assets), what it owes (liabilities), and how much owners and shareholders have invested (equity).

Including a balance sheet in your business plan is an essential part of your financial forecast , alongside the income statement and cash flow statement.

These statements give anyone looking over the numbers a solid idea of the overall state of the business financially. In the case of the balance sheet in particular, what it’s telling you is whether or not you’re in debt, and how much your assets are worth. This information is critical to managing your business and the creation of a business plan.

The balance sheet includes spending and income that isn’t in the income statement (also called a profit and loss statement). For example, the money you spend to repay a loan or buy new assets doesn’t show up in the income statement. And the money you take in as a new loan or a new investment doesn’t show up in the income statement either. The money you are waiting to receive from customers’ outstanding invoices shows up in the balance sheet, not the income statement.

Among other things, your balance sheet can be used to determine your company’s net worth. By subtracting liabilities from assets, you can determine your company’s net worth at any given point in time.

• Key components of the balance sheet

Typically, a balance sheet is divided into three main parts: Assets, liabilities, and owner’s equity.

Assets on a balance sheet or typically organized from top to bottom based on how easily the asset can be converted into cash. This is called “liquidity.” The most “liquid” assets are at the top of the list and the least liquid are at the bottom of the list.

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In the context of a balance sheet, cash means the money you currently have on hand. In business planning, the term “cash” represents the bank or checking account balance for the business, also sometimes referred to as “cash and cash equivalents” or “CCE.”

A cash equivalent is an asset that is liquid and can be converted to cash immediately, like a money market account or a treasury bill.

Accounts receivable

Accounts receivable is money people are supposed to pay you, but that you have not actually received yet (hence the “receivables”).

Usually, this money is sales on credit, often from business-to-business (or “B2B”) sales, where your business has invoiced a customer but has not received payment yet.

Inventory includes the value of all of the finished goods and ready materials that your business has on hand but hasn’t sold yet.

Current assets

Current assets are those that can be converted to cash within one year or less. Cash, accounts receivable, and inventory are all current assets, and these amounts accumulated are sometimes referenced on a balance sheet as “total current assets.”

Long-term assets

Long-term assets are also referred to as “fixed assets” and include things that will have a long-standing value, such as land or equipment. Long-term assets typically cannot be converted to cash quickly.

Accumulated depreciation

Accumulated depreciation reduces the value of assets over time. For example, if a business purchases a car, the car will lose value as time goes on.

Total long-term assets

Total long-term assets is used to describe long-term assets plus depreciation on a balance sheet.

Liabilities

Like assets, liabilities are ordered by how quickly a business needs to pay them off. Current liabilities are typically due within one year. Long-term liabilities are due at any point after one year.

Accounts payable

Accounts payable is the money that your business owes to other vendors, the other side of the coin to “accounts receivable.” Your accounts payable number is the regular bills that your business is expected to pay.

Pay attention to whether this number is exceedingly high, especially if your business doesn’t have enough to cover it.

Sales taxes payable

This only applies to businesses that don’t pay sales tax right away, for example, a business that pays its sales tax each quarter. That might not be your business, so if it doesn’t apply, skip it.

Short-term debt

This is debt that you have to pay back within a year—usually any short-term loan. This can also be referred to on a balance sheet as a line item called current liabilities or short-term loans. Your related interest expenses don’t go here or anywhere on the balance sheet; those should be included in the income statement.

Total current liabilities

The above numbers added together are considered the current liabilities of a business, meaning that the business is responsible for paying them within one year.

Long-term debt

These are the financial obligations that it takes more than a year to pay back. This is often a hefty number, and it doesn’t include interest. For example, this number reflects long-term loans on things like buildings or expensive pieces of equipment. It should be decreasing over time as the business makes payments and lowers the principal amount of the loan.

Total liabilities

Everything listed above that you have to pay out or back is added together.

This is the sum of all shareholder money invested in the business and accumulated business profits. Owner’s equity includes common stock, retained earnings, and paid-in-capital.

Paid-in capital

Money is paid into the company as investments. This is not to be confused with the par value or market value of stocks. This is actual money paid into the company as equity investments by owners.

Retained earnings

Earnings (or losses) that have been reinvested into the company, that have not been paid out as dividends to the owners. When retained earnings are negative, the company has accumulated losses. This can also be referred to as “shareholder’s equity.”

This doesn’t apply to all legal structures for a business; if you are a pass-through tax entity , then all profits or losses will be passed on to owners, and your balance sheet should reflect that.

Net earnings

This is an important number—the higher it is, the more profitable your company is. This line item can also be called income or net profit. Earnings are the proverbial “bottom line”: sales less costs of sales and expenses.

Total owner’s equity

Equity means business ownership, also called capital. Equity can be calculated as the difference between assets and liabilities. This can also be referred to as “shareholder’s equity” or “stockholder’s equity.”

Total liabilities and equity

This is the final equation I mentioned at the beginning of this post, assets = liabilities + equity.

• How to use the balance sheet

Your balance sheet can provide a wealth of useful information to help improve financial management. For example, you can determine your company’s net worth by subtracting your balance sheet liabilities from your assets, as noted above.

Overall, the balance sheet gives you insights into the health of your business. It’s a snapshot of what you have (assets) and what you owe (liabilities). Keeping tabs on these numbers will help you understand your financial position and if you have enough cash to make further investments in your business.

Perhaps the most useful aspect of your balance sheet is its ability to alert you to upcoming cash shortages. After a highly profitable month or quarter, for example, business owners sometimes get lulled into a sense of financial complacency if they don’t consider the impact of upcoming expenses on their cash flow .

There are two easy-to-figure ratios that can be computed from the balance sheet to help determine whether your company will have sufficient cash flow to meet current financial obligations:

Current ratio

This measures liquidity to show whether your company has enough current (i.e., liquid) assets on hand to pay bills on-time and run operations effectively. It is expressed as the number of times current assets exceeds current liabilities.

The higher the current ratio, the better. A current ratio of 2:1 is generally considered acceptable for inventory-carrying businesses, although industry standards can vary widely. The acceptable current ratio for a retail business, for example, is different from that of a manufacturer.

Current ratio formula

Current Assets / Current Liabilities

Quick ratio

This ratio is similar to the current ratio but excludes inventory. A quick ratio of 1.5:1 is generally desirable for non-inventory-carrying businesses, but—just as with current ratios—desirable quick ratios differ from industry to industry.

Quick ratio formula

Current Assets – Inventory / Current Liabilities

Knowing your industry’s standards is an important part of evaluating your business’s balance sheet effectively.

• The limits of the balance sheet

Remember, the balance sheet alone doesn’t give you a complete view of your business finances. You’ll want to keep tabs on your profit & loss statement (income statement) and cash flow as well.

Your profit & loss statement will show you the sales you are making and your business expenses and calculates your profitability. This is crucial for understanding the core economics of your business and if you’re building a profitable business, or not.

Your cash flow forecast shows how cash is moving in and out of your business and can help you predict your future cash balances. Fast growth can reduce cash quickly, especially for businesses that carry inventory, so this is a crucial statement to pay attention to as well.

The three statements all work together to provide you with a complete picture of your business. The balance sheet also helps illustrate how cash and profits are very different things .

• Example of a balance sheet

Large businesses will have longer and more complex balance sheets for their businesses, sometimes having separate balance sheets for different segments or departments of their business. A small business balance sheet will be more straightforward and have fewer line items.

Here is a balance sheet from Apple, for example. You’ll see that it includes a complex stockholder’s equity section and several specifically itemized types of long-term assets and liabilities.

Apple’s balance sheet .

You’ll also notice that it says “Period Ending” at the top; this indicates that these numbers are reflective of the time up until the date listed at the top of the column. This terminology is used when you are reporting actual values, not creating a financial forecast for the future.

• Get familiar with your balance sheet

Most companies should update their balance once a month, or whenever lenders ask for an updated balance sheet. Today’s accounting software programs will create your balance sheet for you, but it’s up to you to enter accurate information into the program to generate useful data to work from.

The balance sheet can be an extremely useful financial tool for businesses that understand how to use it properly. If you’re not as familiar with your balance sheet as you’d like to be, now might be a good time to learn more about the workings of your balance sheet and how it can help improve financial management.

Create your balance sheet easily by downloading our Balance Sheet Template , and check out our full guide to write your financial plan.

Trevor is the CFO of Palo Alto Software, where he is responsible for leading the company’s accounting and finance efforts.

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Balance Sheet

Written by True Tamplin, BSc, CEPF®

Reviewed by subject matter experts.

Updated on March 17, 2023

Get Any Financial Question Answered

Table of contents, what is a balance sheet.

A balance sheet is a financial statement that shows the relationship between assets , liabilities , and shareholders’ equity of a company at a specific point in time.

Measuring a company’s net worth, a balance sheet shows what a company owns and how these assets are financed, either through debt or equity .

Balance sheets are useful tools for individual and institutional investors, as well as key stakeholders within an organization, as they show the general financial status of the company.

It is also possible to grasp the information found in a balance sheet to calculate important company metrics, such as profitability, liquidity, and debt-to-equity ratio.

However, it is crucial to remember that balance sheets communicate information as of a specific date. Naturally, a balance sheet is always based upon past data.

While stakeholders and investors may use a balance sheet to predict future performance, past performance does not guarantee future results.

In order to see the direction of a company, you will need to look at balance sheets over a time period of months or years.

How Balance Sheets Work

A balance sheet is guided by the accounting equation:

Both parts should be equal to each other or balance each other out. This means that the assets of a company should equal its liabilities plus any shareholders’ equity that has been issued. Hence, a balance sheet should always balance.

For instance, if a company takes out a ten-year, $8,000 loan from a bank, the assets of the company will increase by $8,000. Its liabilities will also increase by $8,000, balancing the two sides of the accounting equation .

If the company takes $10,000 from its investors, its assets and stockholders’ equity will also increase by that amount.

The revenues of the company in excess of its expenses will go into the shareholder equity account.

These revenues will be balanced on the asset side of the equation, appearing as inventory, cash , investments , or other assets.

Components of a Balance Sheet

A balance sheet has three primary components: assets, liabilities, and shareholders’ equity.

Assets are anything the company owns that holds some quantifiable value, which means that they could be liquidated and turned into cash.

These can include cash, investments, and tangible objects.

Companies divide their assets into two categories: current assets and noncurrent (long-term) assets.

Current Assets

Current assets are typically those that a company expects to convert easily into cash within a year.

These assets include cash and cash equivalents, prepaid expenses, accounts receivable, marketable securities, and inventory.

Non-Current Assets

Noncurrent assets are long-term investments that the company does not expect to convert into cash within a year or have a lifespan of more than one year.

Noncurrent assets include tangible assets , such as land, buildings, machinery, and equipment.

They can also be intangible assets, such as trademarks, patents, goodwill, copyright , or intellectual property.

Liabilities

Liabilities are anything a company owes. These are loans, accounts payable, bonds payable, or taxes.

Like assets, liabilities can be classified as either current or noncurrent liabilities.

Current Liabilities

Current liabilities refer to the liabilities of the company that are due or must be paid within one year.

This may include accounts payables, rent and utility payments, current debts or notes payables, current portion of long-term debt, and other accrued expenses.

Noncurrent Liabilities

Noncurrent or long-term liabilities are debts and other non-debt financial obligations that a company does not expect to repay within one year from the date of the balance sheet.

This may include long-term loans, bonds payable, leases, and deferred tax liabilities.

Shareholder’s Equity

Shareholder’s equity is the net worth of the company and reflects the amount of money left over if all liabilities are paid, and all assets are sold.

Shareholders’ equity belongs to the shareholders, whether public or private owners.

Retained Earnings

Shareholders’ equity reflects how much a company has left after paying its liabilities.

If the company wanted to, it could pay out all of that money to its shareholders through dividends . However, the company typically reinvests the money into the company.

Retained earnings are the money that the company keeps.

Share Capital

Share capital is the value of what investors have invested in the company.

For instance, if someone invests $200,000 to help you start a company, you would count that $200,000 in your balance sheet as your cash assets and as part of your share capital.

Stocks can be common or preferred stocks .

Common stock is those that people get when they buy stock through the stock market . Preferred stock, on the other hand, provides the shareholder with a greater claim on the company’s assets and earnings.

You can also see treasury stock on a balance sheet. This stock is a previously outstanding stock that is purchased from stockholders by the issuing company.

Example of a Balance Sheet

Below is an example of a balance sheet of Tesla for 2021 taken from the U.S. Securities and Exchange Commission .

As you can see, it starts with current assets, then the noncurrent, and the total of both.

Below the assets are the liabilities and stockholders’ equity, which include current liabilities, noncurrent liabilities, and shareholders’ equity.

For example, this balance sheet tells you:

• The reporting period ends December 31, 2021, and compares against a similar reporting period from the year prior.
• The assets of the company total $62,131, including $27,100 in current assets and $35,031 in noncurrent assets.
• The liabilities of the company total $30,548, including $19,705 in current liabilities and $10,843 in noncurrent liabilities.
• The company retained $331 in earnings during the reporting period, greatly less than the same period a year prior.
• Adhering to the accounting equation, a balance is obtained by the total assets of $62,131 and the combined total liabilities and stockholders’ equity which is $62,131.

It is crucial to note that how a balance sheet is formatted differs depending on where the company or organization is based.

How to Prepare a Balance Sheet

The balance sheet is prepared using the following steps:

Step 1: Determine the Reporting Date and Period

The balance sheet previews the total assets, liabilities, and shareholders’ equity of a company on a specific date, referred to as the reporting date.

Often, the reporting date will be the final day of the reporting period. Companies that report annually, like Tesla, often use December 31st as their reporting date, though they can choose any date.

There are also companies, like publicly traded ones, that will report quarterly. For this case, the reporting date will usually fall on the last day of the quarter:

• Q1: March 31
• Q2: June 30
• Q3: September 30
• Q4: December 31

However, it is common for a balance sheet to take a few days or weeks to prepare after the reporting period has ended.

Step 2: Identify Your Assets

You will need to tally up all your assets of the company on the balance sheet as of that date. This will include both current and noncurrent assets.

Assets are typically listed as individual line items and then as total assets in a balance sheet.

This will make it easier for analysts to comprehend exactly what your assets are and where they came from. Tallying the assets together will be required for final analysis.

Step 3: Identify Your Liabilities

Like assets, you need to identify your liabilities which will include both current and long-term liabilities.

Again, these should be organized into both line items and total liabilities. They should also be both subtotaled and then totaled together.

Step 4: Calculate Shareholders’ Equity

After you have assets and liabilities, calculating shareholders’ equity is done by taking the total value of assets and subtracting the total value of liabilities.

Shareholders’ equity will be straightforward for companies or organizations that a single owner privately holds.

The calculation may be complicated for publicly held companies depending on the various types of stock issued.

Line items in this section include common stocks, preferred stocks, share capital, treasury stocks, and retained earnings.

Step 5: Add Total Liabilities to Total Shareholders’ Equity and Compare to Assets

Adding total liabilities to shareholders’ equity should give you the same sum as your assets. If not, then there may be an error in your calculations.

Causes of a balance sheet not truly balancing may be:

• Errors in inventory
• Incorrectly entered transactions
• Incomplete or misplaced data
• Miscalculated loan amortization or depreciation
• Errors in currency exchange rates
• Miscalculated equity calculations

How to Analyze a Balance Sheet

Financial ratio analysis is the main technique to analyze the information contained within a balance sheet.

It uses formulas to obtain insights into a company and its operations.

Using financial ratios in analyzing a balance sheet, like the debt-to-equity ratio, can produce a good sense of the financial condition of the company and its operational efficiency.

It is crucial to remember that some ratios will require information from more than one financial statement, such as from the income statement and the balance sheet.

There are two types of ratios that use data from a balance sheet. These are:

Financial Strength Ratios

Financial strength ratios can provide investors with ideas of how financially stable the company is and whether it finances itself.

It also yields information on how well a company can meet its obligations and how these obligations are leveraged.

Financial strength ratios can include the working capital and debt-to-equity ratios.

Activity Ratios

Activity ratios mainly focus on current accounts to reveal how well the company manages its operating cycle .

These operating cycles can include receivables, payables, and inventory.

Examples of activity ratios are inventory turnover ratio, total assets turnover ratio, fixed assets turnover ratio, and accounts receivables turnover ratio.

These ratios can yield insights into the operational efficiency of the company.

Importance of a Balance Sheet

There are a few key reasons why a balance sheet is important. Here are a few of them:

Balance Sheets Examine Risk

A balance sheet lists all assets and liabilities of a company.

With this information, a company can quickly assess whether it has borrowed a large amount of money, whether the assets are not liquid enough, or whether it has enough current cash to fulfill current demands.

Balance Sheets Secure Capital

A lender will usually require a balance sheet of the company in order to secure a business plan.

Additionally, a company must usually provide a balance sheet to private investors when planning to secure private equity funding.

These are some of the cases in which external parties want to assess and check a company’s financial stability and health, its creditworthiness, and whether the company will be able to settle its short-term debts.

Balance Sheets are Needed for Financial Ratios

Business owners use these financial ratios to assess the profitability, solvency, liquidity , and turnover of a company and establish ways to improve the financial health of the company.

Some financial ratios need data and information from the balance sheet.

Balance Sheets Lure and Retain Talents

Good and talented employees are always looking for stable and secure companies to work in.

Balance sheets that are disclosed from public companies allow employees a chance to review how much the company has on hand and whether the financial health of the company is in accordance with their expectations from their employers.

Limitations of a Balance Sheet

Although balance sheets are important financial statements, they do have their limitations. Here are some of them:

Balance Sheets are Static

It may not provide a full snapshot of the financial health of a company without data from other financial statements.

In order to get a complete understanding of the company, business owners and investors should review other financial statements, such as the income statement and cash flow statement.

Balance Sheets Have a Narrow Scope of Timing

The balance sheet only reports the financial position of a company at a specific point in time.

This may not provide an accurate portrayal of the financial health of a company if the market conditions rapidly change or without knowledge of previous cash balance and understanding of industry operating demands.

Balance Sheets May Be Susceptible to Errors and Fraud

The data and information included in a balance sheet can sometimes be manipulated by management in order to present a more favorable financial position for the company.

Businesses should be wary of companies that have large discrepancies between their balance sheets and other financial statements.

It is also helpful to pay attention to the footnotes in the balance sheets to check what accounting systems are being used and to look out for red flags.

Balance Sheets Are Subject to Several Professional Judgment Areas That Could Impact the Report

For instance, accounts receivable should be continually assessed for impairment and adjusted to reveal potential uncollectible accounts.

A company should make estimates and reflect their best guess as a part of the balance sheet if they do not know which receivables a company is likely actually to receive.

Balance Sheets vs. Income Statements

Here are some key differences between balance sheets and income statements:

The Bottom Line

Balance sheets are important financial statements that provide insights into the assets, liabilities, and shareholders’ equity of a company.

It is helpful for business owners to prepare and review balance sheets in order to assess the financial health of their companies.

Balance sheets also play an important role in securing funding from lenders and investors. Additionally, it helps businesses to retain talents.

Although balance sheets are important, they do have their limitations, and business owners must be aware of them.

Some of its limitations are that it is static, has a narrow scope of timing, and is subject to errors and frauds.

A balance sheet is also different from an income statement in several ways, most notably the time frame it covers and the items included.

It is important to understand that balance sheets only provide a snapshot of the financial position of a company at a specific point in time.

In order to get a more accurate understanding of the company, business owners and investors should review other financial statements, such as the income statement and cash flow statement.

Balance Sheet FAQs

What is included in the balance sheet.

Balance sheets include assets, liabilities, and shareholders' equity. Assets are what the company owns, while liabilities are what the company owes. Shareholders' equity is the portion of the business that is owned by the shareholders.

Who prepares the balance sheet?

The balance sheet is prepared by the management of the company. The auditor of the company then subjects balance sheets to an audit. Balance sheets of small privately-held businesses might be prepared by the owner of the company or its bookkeeper. On the other hand, balance sheets for mid-size private firms might be prepared internally and then reviewed over by an external accountant.

What is the balance sheet formula?

The balance sheet equation is: Assets = Liabilities + Shareholders' Equity

What is the purpose of the balance sheet?

The balance sheet is used to assess the financial health of a company. Investors and lenders also use it to assess creditworthiness and the availability of assets for collateral.

How often are balance sheets required?

Balance sheets are typically prepared at the end of set periods (e.g., annually, every quarter). Public companies are required to have a periodic financial statement available to the public. On the other hand, private companies do not need to appeal to shareholders. That is why there is no need to have their financial statements published to the public.

About the Author

True Tamplin, BSc, CEPF®

True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.

True is a Certified Educator in Personal Finance (CEPF®), author of The Handy Financial Ratios Guide , a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University , where he received a bachelor of science in business and data analytics.

To learn more about True, visit his personal website or view his author profiles on Amazon , Nasdaq and Forbes .

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How to write a balance sheet for a business plan

Table of Contents

What is a balance sheet?

Elements of a balance sheet, liabilities, how to write a balance sheet, manage your business finances with countingup.

A balance sheet is one of three major financial statements that should be in a business plan – the other two being an income statement and cash flow statement .  

Writing a balance sheet is an essential skill for any business owner. And while business accounting can seem a little daunting at first, it’s actually fairly simple. 

To help you write the perfect balance sheet for your business plan, this guide covers everything you need to know, including:

• What are assets?
• What are liabilities?
• What is equity?

A balance sheet is a financial statement that shows a business’ “book value”, or the value of a company after all of its debts are paid. 

For those inside the business, it provides valuable financial insights, allowing the owners to assess their current financial situation and plan for the future. 

For external investors, a balance sheet lets them know whether it’s a worthwhile investment.  

Putting a balance sheet together isn’t all that difficult. You just need to know the value of three things:

• Owner’s equity

Once you know these three figures, there’s just a little bit of maths – nothing too scary though.

Assets are items or resources that have financial value. They might be physical items, machinery and vehicles, or they could be intangible items, like copyrights or brand identity .

Assets are separated into two groups based on how quickly you can turn them into cash. There are current assets and fixed assets. 

Current assets are things that are fairly simple to value and sell, such as:

• Stock and inventory
• Cash in the bank
• Money owed to you (through unpaid invoices )
• Customer deposits
• Office furniture, equipment or supplies
• Phones or laptops
• Even relatively trivial items like a coffee machine or pool table

Fixed assets are valuable items that take much longer to sell, such as:

• Property or buildings
• Specialised equipment for your business operations
• Investments
• Vehicles 

On your balance sheet, the asset column is the simplest. All you need to do is list each item your business owns, along with their individual values, in a separate column. Then, add up the values to get a total at the bottom. 

Liabilities are the funds that you owe to other people, banks, or businesses. They can be:

• A business loan (the total, not the monthly payment amount)
• A mortgage or rent payment on a property
• Supplier contracts you owe
• Your accounts payable total
• Other financial obligations, such as paying wages or freelancers for support
• Taxes you’ll owe to HMRC

List these in the same way you did with your assets – on a spreadsheet with their values in a separate column. 

When you know the value of your assets and liabilities, working your equity is simple – it’s just the total value of your assets, minus the total value of your liabilities. 

Record the owner’s equity in the same column as your liabilities. When you add them all up, it should be the same value as your assets. 

After you’ve totalled up your assets, liabilities, and owner’s equity, all that’s left to do is fill in your balance sheet. 

Using a spreadsheet, record your assets on the left and your liabilities and owner’s equity on the right. 

For example, here’s what a balance sheet might look like for a painter and decorator:

If you’ve recorded everything correctly, both sides should have the same total. Whenever you make a change, the balance sheet will change, but it should still be balanced. 

For example, let’s say our painter and decorator sold their equipment. In that case, they’d lose an asset worth £200, but they’d also gain £200 in cash, so the asset total would stay the same. 

Alternatively, let’s say they lost the equipment altogether and got no money for it. In that case, they’d lose £200, leaving their asset total at £5,600. Then, they’d have to adjust the other side, so it remains balanced, like this:

If your two totals are not balanced, it’s most likely for one of these reasons:

• Incomplete or missing information
• Incorrect data entry
• A mistake in exchange rates
• And inventory miscount

Basically, if things don’t look right, try not to panic. It’s normally a simple mistake, so go over the figures again and you’ll find the culprit. 

The trickiest part of writing a balance sheet for a business plan is accurately recording financial information. 

With the Countingup business current account, you’ll have access to a digital record of all your transactions in one simple app, giving you all the financial information you’ll need for a business plan.

Start your three-month free trial today. 

Find out more here .

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A balance sheet is a vital financial statement that presents a detailed snapshot of a company’s financial condition at a specific point in time by categorizing its assets, liabilities, and equity

Key Takeaways

• Balance Sheet as an Essential Financial Tool: It is crucial for assessing a company’s financial health, providing a clear overview of its assets, liabilities, and equity.
• Reflecting Financial Position: A balance sheet offers a snapshot of a company’s financial position at a specific point in time, showing the value of Tangible Assets, Current Assets, and Current Liabilities.
• Importance of Equity in Balance Sheets: Equity reflects the owner’s stake in the company, balancing the assets against the liabilities.
• Role of Current Assets and Current Liabilities:  Understanding the balance between Current Assets and Current Liabilities on a balance sheet helps in assessing a company’s short-term financial health.
• Consultation with a Financial Advisor: A financial advisor can provide expert analysis, aiding in better financial decision-making.
• Understanding Owner’s Equity vs. Shareholder’s Equity: Owner’s Equity refers to the owner’s personal stake, while Shareholder’s Equity represents the shareholders’ claims on the company’s assets.
• Comprehensive Financial Analysis: A balance sheet, when read in conjunction with other financial statements, offers a comprehensive view of a company’s financial status.

The balance sheet plays a critical role in financial reporting by offering a clear picture of what a company owns (its assets) and what it owes (its liabilities), along with the Equity value held by its owners or shareholders. Assets are resources controlled by the company, capable of generating future economic benefits. They are classified as either Current Assets, like cash and inventory, which are expected to be converted into cash within a year, or long-term assets like property and equipment. Liabilities represent obligations of the company that result in an outflow of resources, with Current Liabilities due within a year, such as accounts payable, and long-term liabilities like bank loans.

The balance sheet also shows the company’s Equity, which includes Retained Earnings and can be referred to as Shareholder’s Equity or Owner’s Equity, depending on the business structure.

The balance sheet is essential for assessing a company’s liquidity, solvency, and overall financial health. The Current Ratio, calculated from Current Assets and Current Liabilities, is an example of a key financial metric derived from the balance sheet to evaluate a company’s short-term financial strength.

Startup Entrepreneurs

For startup entrepreneurs, the balance sheet is a critical tool in securing funding and managing growth. Consider a startup poised for expansion, seeking investors. The investors scrutinize the balance sheet for insights into the startup’s financial health, assessing current assets, current liabilities, and equity to gauge the company’s stability and growth potential.

It serves dual purposes for startups. It provides financial transparency, presenting a clear view of assets, including fixed assets, and liabilities. It’s an indispensable part of the financial triad, along with the income statement and cash flow reports. Preparing it involves detailing total assets and balancing them against liabilities and equity. This clarity is vital for strategic decision-making, particularly in evaluating short-term financial standing and planning for sustainable growth.

In real-world scenarios, startups utilize balance sheets for strategic decisions such as budget allocation and investment planning. It’s essential for understanding the company’s leverage and liquidity positions. For example, a startup might adjust its focus towards current assets for operational efficiency or manage current liabilities to maintain a healthy current ratio.

Business Students

For business students, understanding a balance sheet is a fundamental skill. As a student, look for case studies where a corporation’s balance sheet is dissected to reveal its financial health. These real-world examples will demonstrate the vital importance of the balance sheet in corporate analysis.

A thorough grasp of balance sheets enables students to evaluate a company’s financial position accurately. They learn to correlate Total Assets, including Fixed Assets, with Current Liabilities and Equity, gaining insights into the company’s operational efficiency and financial stability.

Students should learn to read and analyze balance sheets, understanding the interplay between different financial statements, including the Income Statement and Cash Flow reports. This knowledge is crucial for identifying trends, assessing risks, and making informed financial decisions.

Real-life applications of balance sheet analysis in different industries further bridge the gap between theory and practice. For instance, in manufacturing, the evaluation of Fixed Assets and depreciation policies can significantly influence profitability assessments.

Imagine a small business, “Bella’s Boutique,” a thriving local clothing store. The owner, Bella, decides to expand her business and needs to secure a loan. To do this, she turns to her balance sheet. It clearly displays her Current Assets, including cash from sales and her inventory, alongside her Fixed Assets, like store fixtures and computer systems.

It also lists Bella’s Current Liabilities, such as her outstanding supplier payments, and long-term debts, reflecting the business’s overall financial obligations. Her Equity section shows the amount invested and retained in the business. This detailed financial snapshot is crucial for Bella, as it demonstrates her business’s capacity to manage additional debt.

For SMB owners like Bella, understanding and managing the balance sheet is key to financial health. Creating one involves listing all Assets, balancing them against liabilities and Equity. This process is complemented by analyzing other financial statements, such as the Income Statement and Cash Flow reports, to gain a comprehensive view of the business’s financial standing.

In Bella’s case, her well-managed financial statements proved invaluable. It not only assisted her in securing the loan for expansion but also provided a clear framework for future financial planning.

Pre-Planning Process

In the context of the Pre-Planning Process for startups, the relevance of a balance sheet can vary. Initially, when a business is not yet generating financial data or is in the ideation phase, creating a detailed balance sheet may not be immediately applicable. This stage is often more focused on understanding customer needs, refining core offerings, and outlining a business model, as indicated in the Pre-Planning Process documentation.

As the startup progresses beyond the pre-planning phase and begins actual operations, the balance sheet becomes a critical tool for financial planning and management. It provides a clear view of the company’s financial position, detailing assets, liabilities, and equity. This information is vital for tracking the growth of the business, managing equity stakes, and making informed decisions for long-term sustainability.

While a balance sheet may not be a primary focus during the initial pre-planning stages of a startup, gaining an understanding of it is crucial for entrepreneurs. This knowledge becomes increasingly important as the business grows and starts to generate financial data, making balance sheets an essential component of effective financial management and planning.

Business Plan Document Development

In the Business Plan Document Development process, the inclusion of a projected balance sheet is crucial in the financial planning section. For entrepreneurs developing their business plans, a pro forma provides a forecast of expected Net Assets, Net Income, and Equity positions. This projection is essential for lenders or investors, as it offers a glimpse into the future financial health of the business, showcasing how the company plans to allocate its resources and handle liabilities.

However, if the business plan is still in a conceptual phase, a detailed balance sheet might not be immediately relevant. During early planning stages, entrepreneurs often focus more on defining their business model and market analysis. In these cases, itmight be more generic or simplified, primarily serving as a tool for internal planning rather than for external presentation.

Yet, as the business plan evolves and becomes more detailed, especially in terms of financial projections, it becomes increasingly important. It becomes a key document that lenders and investors review to assess the viability of the business. A well-prepared balance sheet reflects the entrepreneur’s understanding of the business’s financial trajectory, including anticipated Equity growth and Net Income generation, thus playing a critical role in securing funding and support.

Frequently Asked Questions

• What is the difference between assets and liabilities on a balance sheet?

On a balance sheet, assets represent what a company owns, such as Current Assets (cash, inventory) and Intangible Assets (patents, trademarks). Liabilities, on the other hand, are what the company owes, including Current Liabilities (short-term debts) and Long-Term Liabilities (long-term loans).

• How often should a balance sheet be updated and reviewed?

A balance sheet should be updated and reviewed regularly, typically on a quarterly or annual basis. This regular review helps in maintaining an accurate picture of the company’s financial position.

• How does equity fit into a balance sheet?

Equity on a balance sheet represents the owner’s interest in the company. It’s calculated as the difference between total assets and Total Liabilities and includes items like Retained Earnings and contributed capital.

• What are the characteristics of a balance sheet that reflects a strong financial position?

A healthy balance sheet example typically shows a balance of assets and liabilities, with a positive Net Worth. This indicates that the company has more assets than liabilities, suggesting financial stability.

• Why are previous balance sheets important for a business?

Reviewing previous balance sheets allows businesses to track their financial progress over time, identify trends, and make informed decisions for future growth and stability. It’s a vital part of analyzing the company’s historical financial performance.

Related Terms

Also see: Income Statement , Cash Flow , Equity , Financial Projections , Depreciation , Dividend , EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) , Ending Inventory , Startup Assets , Owner’s Equity

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What Is A Balance Sheet? (Example Included)

Updated: Jun 1, 2024, 2:22pm

Table of Contents

What is a balance sheet, components of a balance sheet, how to balance a balance sheet, why is a balance sheet important, balance sheet example, frequently asked questions (faqs).

When you’re starting a company, there are many important financial documents to know. It might seem overwhelming at first, but getting a handle on everything early will set you up for success in the future. Today, we’ll go over what a balance sheet is and how to master it to keep accurate financial records.

A balance sheet is a comprehensive financial statement that gives a snapshot of a company’s financial standing at a particular moment. A balance sheet covers a company’s assets as defined by its liabilities and shareholder equity.

Balance Sheet Time Periods

When investors ask for a balance sheet, they want to make sure it’s accurate to the current time period. They might want to see a past balance sheet as well. It’s important to keep accurate balance sheets regularly for this reason.

Assets are any resources your company owns that holds value. When setting up a balance sheet, you should order assets from current assets to long-term assets. Long-term assets can’t be converted immediately into cash on hand. They’re important to include, but they can’t immediately be converted into liquid capital.

There are a few different types of assets to list that your company probably has on-hand:

• Liquid assets: Cash and cash equivalents, such as certificates of deposit (CDs)
• Accounts receivable (A/R): Money owed to your company
• Marketable securities: Liquid assets that are readily convertible into cash (generally reported under cash and cash equivalents)
• Inventory: Any products you have available for sale
• Prepaid expenses: Rent, insurance and contracts with vendors

These are examples of long-term assets:

• Investments or securities that can’t be liquidated within the next year
• Fixed assets: Land, machinery and buildings
• Intangible assets: Intellectual property, brand awareness and company reputation

Want more information? Here’s everything you need to know about assets .

Liabilities

A liability is money that your company owes to any outside entity. Liabilities refer to basic aspects of your business: taking in money, loans, providing services and everything else your business does.

Liabilities are categorized as current and long-term as well. Current liabilities are customer prepayments for which your company needs to provide a service, wages, debt payments and more.

On the other hand, long-term liabilities are long-term debts like interest and bonds, pension funds and deferred tax liability.

Shareholder Equity

Finally, shareholder equity refers to your company’s net assets. The shareholder equity comprises the following:

• Money generated by a company
• Money put into the business by its owners and shareholders
• Any other capital put into the business

You can calculate total equity by subtracting liabilities from your company’s total assets.

When creating a balance sheet, start with two sections to make sure everything is matching up correctly. On one side, you’ll have the business’s assets. On the other side, you’ll put the company’s liabilities and shareholder equity.

The numbers should match up exactly: the total assets must be equal to the liabilities and shareholder assets. If these numbers aren’t the same, there might be an issue with your calculations or a missing asset or liability. Before sharing with any possible investors, make sure to check over your balance sheet several times.

Balance sheets are important because they give a picture of your company’s financial standing. Before getting a business loan or meeting with potential investors, a company has to provide an up-to-date balance sheet. A potential investor or loan provider wants to see that the company is able to keep payments on time.

Department heads can also use a balance sheet to understand the financial health of the company. Looking at the balance sheet and its components helps them keep track of important payments and how much cash is available on hand to pay these vendors.

Overall, a balance sheet is an important statement of your company’s financial health, and it’s important to have accurate balance sheets available regularly.

This is an example of a basic balance sheet and what’s included.

Download Balance Sheet Example

In this example, the imagined company had its total liabilities increase over the time period between the two balance sheets and consequently the total assets decreased.

Bottom Line

A balance sheet is a financial document that you should work on calculating regularly. If there are discrepancies, that means you’re missing important information for putting together the balance sheet.

Why do we need a balance sheet?

The balance sheet is a report that gives a basic snapshot of the company’s finances. This is an important document for potential investors and loan providers.

How do I calculate a balance sheet?

The formula is very basic: total assets = total liabilities + total equity. If you have questions about the individual components of the balance sheet, you might have to consult a finance expert.

What is the best accounting software for small businesses?

There are a number of high-quality accounting software solutions available. The overall best include OnPay, Gusto and QuickBooks. To find out which is the right option for your business, check out our article detailing the best accounting software for small businesses .

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Understanding a Balance Sheet (With Examples and Video)

Frances McInnis

Reviewed by

May 3, 2024

This article is Tax Professional approved

Balance sheets can help you see the big picture: the net worth of your small business, how much money you have, and where it’s kept. They’re also essential for getting investors, securing a loan , or selling your business.

So you definitely need to know your way around one. That’s where this guide comes in. We’ll walk you through balance sheets, one step at a time.

I am the text that will be copied.

What is a balance sheet?

The balance sheet is one of the three main financial statements , along with the income statement and cash flow statement .

While income statements and cash flow statements show your business’s activity over a period of time, a balance sheet gives a snapshot of your financials at a particular moment. It incorporates every journal entry since your company launched. Your balance sheet shows what your business owns (assets), what it owes (liabilities) , and what money is left over for the owners ( owner’s equity ).

Because it summarizes a business’s finances, the balance sheet is also sometimes called the statement of financial position. Companies usually prepare one at the end of a reporting period, such as a month, quarter, or year.

The purpose of a balance sheet

Because the balance sheet reflects every transaction since your company started, it reveals your business’s overall financial health. Investors, business owners, and accountants can use this information to give a book value to the business, but it can be used for so much more.

At a glance, you’ll know exactly how much money you’ve put in, or how much debt you’ve accumulated. Or you might compare current assets to current liabilities to make sure you’re able to meet upcoming payments.

The information in your company’s balance sheet can help you calculate key financial ratios, such as the debt-to-equity ratio, a metric which shows the ability of a business to pay for its debts with equity (should the need arise). Even more immediately applicable is the current ratio : current assets / current liabilities. This will tell you whether you have the ability to pay all your debts in the next 12 months.

You can also compare your latest balance sheet to previous ones to examine how your finances have changed over time. You’ll be able to see just how far you’ve come since day one.

A simple balance sheet template

You can download a simple balance sheet template here . You record the account name on the left side of the balance sheet and the cash value on the right.

What goes on a balance sheet

At a high level, a balance sheet works the same way across all business types. They are organized into three categories: assets, liabilities, and owner’s equity.

Let’s start with assets—the things your business owns that have a dollar value.

List your assets in order of liquidity , or how easily they can be turned into cash, sold or consumed. Bank accounts and other cash accounts should come first followed by fixed assets or tangible assets like buildings or equipment with a useful life longer than a year. Even intangible assets like intellectual properties, trademarks, and copyrights should be included. Anything you expect to convert into cash within a year are called current assets.

Current assets include:

• Money in a checking account
• Money in transit (money being transferred from another account)
• Accounts receivable (money owed to you by customers)
• Short-term investments
• Prepaid expenses
• Cash equivalents (currency, stocks, and bonds)

Long-term assets (or non-current assets), on the other hand, are things you don’t plan to convert to cash within a year.

Long-term assets include:

• Buildings and land
• Machinery and equipment (less accumulated depreciation )
• Intangible assets like patents, trademarks, copyrights, and goodwill (you would list the market value of what fair price a buyer might purchase these for)
• Long-term investments

Let’s say you own a vegan catering business called “Where’s the Beef”. As of December 31, your company assets are: money in a checking account, an unpaid invoice for a wedding you just catered, and cookware, dishes and utensils worth $900. Here’s how you’d list your assets on your balance sheet:

Liabilities

Next come your liabilities—your business’s financial obligations and debts.

List your liabilities by their due date. Just like assets, you’ll classify them as current liabilities (due within a year) and non-current liabilities (the due date is more than a year away). These are also known as short-term liabilities and long-term liabilities.

Your current liabilities might include:

• Accounts payable (what you owe suppliers for items you bought on credit)
• Wages you owe to employees for hours they’ve already worked
• Loans that you have to pay back within a year
• Credit card debt

And here are some non-current liabilities:

• Loans that you don’t have to pay back within a year
• Bonds your company has issued

Returning to our catering example, let’s say you haven’t yet paid the latest invoice from your tofu supplier. You also have a business loan, which isn’t due for another 18 months.

Here are Where’s the Beef’s liabilities:

Equity is money currently held by your company. This category is usually called “owner’s equity” for sole proprietorships and “stockholders’ equity” or “shareholders’ equity” for corporations. It shows what belongs to the business owners and the book value of their investments (like common stock, preferred stock, or bonds).

Owners’ equity includes:

• Capital (the amount of money invested into the business by the owners)
• Private or public stock
• Retained earnings (all your revenue minus all your expenses and distributions since launch)

Equity can also drop when an owner draws money out of the company to pay themself, or when a corporation issues dividends to shareholders.

For Where’s the Beef, let’s say you invested $2,500 to launch the business last year, and another $2,500 this year. You’ve also taken $9,000 out of the business to pay yourself and you’ve left some profit in the bank.

Here’s a summary of Where’s the Beef’s equity:

The balance sheet equation

This accounting equation is the key to the balance sheet:

Assets = Liabilities + Owner’s Equity

Assets go on one side, liabilities plus equity go on the other. The two sides must balance—hence the name “balance sheet.”

It makes sense: you pay for your company’s assets by either borrowing money (i.e. increasing your liabilities) or getting money from the owners (equity).

A sample balance sheet

We’re ready to put everything into a standard template ( you can download one here ). Here’s what a sample balance sheet looks like, in a proper balance sheet format:

Nice. Your balance sheet is ready for action.

Great. Now what do I do with it?

Because the balance sheet reflects every transaction since your company started, it reveals your business’s overall financial health. At a glance, you’ll know exactly how much money you’ve put in, or how much debt you’ve accumulated. Or you might compare current assets to current liabilities to make sure you’re able to meet upcoming payments.

You can also compare your latest balance sheet to previous ones to examine how your finances have changed over time. You’ll be able to see just how far you’ve come since day one. If you need help understanding your balance sheet or need help putting together a balance sheet, consider hiring a bookkeeper .

Here’s some metrics you can calculate using your balance sheet:

• Debt-to-equity ratio (D/E ratio): Investors and shareholders are interested in the D/E ratio of a company to understand whether they raise money through investment or debt. A high D/E ratio shows a business relies heavily on loans and financing to raise money.
• Working capital : This metric shows how much cash you would hold if you paid off all your debts. It signals to investors and lenders how capable you are to pay down your current liabilities.
• Return on Assets: A formula for calculating how much net income is being earned relative to the assets owned. The more income earned relative to the amount of assets, the higher performing a business is considered to be.

Next, we’ll cover the three most important ratios that you can calculate using your balance sheet: the current ratio, the debt-to-equity ratio, and the quick ratio.  

The current ratio

Can your company pay its debts? The current ratio measures the liquidity of your company—how much of it can be converted to cash, and used to pay down liabilities. The higher the ratio, the better your financial health in terms of liquidity .

The ratio for finding your current ratio looks like this:

Current Ratio = Current Assets / Current Liabilities

You should aim to maintain a current ratio of 2:1 or higher. Meaning, your company holds twice as much value in assets as it does in liabilities. If you had to, you could pay off all the money you owe two times over.

Once you drop below a current ratio of 2:1, your liquidity isn’t looking so good. And if you dip below 1:1, you’re entering hot water. That means you don’t have enough liquidity to pay off your debts.

You can improve your current ratio by either increasing your assets or decreasing your liabilities.

The quick ratio

Also called the acid test ratio, the quick ratio describes how capable your business is of paying off all its short-term liabilities with cash and near-cash assets. In this case, you don’t include assets like real estate or other long-term investments. You also don’t include current assets that are harder to liquidate, like inventory. The focus is on assets you can easily liquidate.

Here’s how you get the quick ratio:

Quick Ratio = (Cash and Cash Equivalents + Marketable Securities + Accounts Receivable) / Current Liabilities

If your ratio is 1:1 or better, you’re sitting pretty. That means you’ve got enough quick-to-liquidate assets to cover all your short term liabilities in a pinch.

The debt-to-equity ratio

Similar to the current ratio and quick ratio, the debt-to-equity ratio measures your company’s relationship to debt. Only, in this case, the key value is your total equity.

This ratio tells you how much your company depends upon equity to keep running versus how much it depends on outside lenders. It’s calculated like this:

Debt to Equity Ratio = Total Outside Liabilities / Owner or Shareholders’ Equity

Generally speaking, a 2:1 ratio is considered acceptable. If the ratio gets bigger, you start running into trouble. It means your business relies heavily on debt to keep running, which turns off investors. The higher the ratio, the higher the chance that, in the event you need to pay off your debt, you’ll use up all your earnings and cash flows—and investors will end up empty-handed.

Examples of balance sheet analysis

We’ll do a quick, simple analysis of two balance sheets, so you can get a good idea of how to put financial ratios into play and measure your company’s performance.

Annie’s Pottery Palace, a large pottery studio, holds a lot of its current assets in the form of equipment—wheels and kilns for making pottery. Accounts receivable play a relatively minor role.

Liabilities are few—a small loan to pay off within the year, some wages owed to employees, and a couple thousand dollars to pay suppliers.

Annie’s is a single-member LLC—there are no shareholders, so her equity includes only her initial investment, retained earnings, and Annie’s draw($4,000).

Ratio analysis:

Current ratio: 22,000 / 7,000 = 3.14:1

Annie’s current ratio is very healthy. If necessary, her current assets could pay off her current liabilities more than three times over.

Quick ratio: 6,000 / 7,000 = 0.85:1

Her quick ratio isn’t looking so hot, though. Annie’s currently sitting just below 1:1, meaning she wouldn’t be able to quickly pay off debt.

Debt-to-equity ratio: 7,000 / 15,000 = 0.46:1

Annie’s debt-to-equity looks good. She’s got more than twice as much owner’s equity than she does outside liabilities, meaning she’s able to easily pay off all her external debt.

Final analysis:

Annie is able to cover all of her liabilities comfortably—until we take her equipment assets out of the picture. Most of her assets are sunk in equipment, rather than quick-to-cash assets. With this in mind, she might aim to grow her easily liquidated assets by keeping more cash on hand in the business checking account.

That being said, her owner’s equity is more than capable of covering her debt, so this problem shouldn’t be difficult to fix. It would be wise for Annie to take care of it before applying for loans or bringing on investors.

Example balance sheet analysis: Bill’s Book Barn LTD.

A lot of Bill’s assets are tied up in inventory—his large collection of books. The rest mostly consists of long-term investments and intangible assets. (Bill’s Book Barn is famous among collectors of rare fly-tying manuals; a business consultant valued his list of dedicated returning customers at $10,000.)

He doesn’t have a lot of liabilities compared to his assets, and all of them are short-term liabilities. Meaning, he’ll need to pay off that $17,000 within a year.

Finally, since Bill is incorporated, he has issued shares of his business to his brother Garth. Currently, Garth holds a $12,000 share in the business, a little shy of half its total equity.

Ratio analysis

Current ratio: 30,000 / 17,000 = 1.76:1

Since long-term investments and intangible assets are tough to liquidate, they’re not included in current assets—meaning Bill has $30,000 in assets he can more or less easily use to cover his liabilities. His ratio of 1.76:1 isn’t great—it doesn’t leave much wiggle room if he wants to pay off his liabilities. But it isn’t terrible, either—he’s just shy of a healthy 2:1 ratio.

Quick ratio: 7,000 / 17,000 = 0.41:1

Bill’s quick ratio is pretty dire—he’s well short of paying off his liabilities with cash and cash equivalents, leaving him in a bind if he needs to take care of that debt ASAP.

Debt-to-equity ratio: 17,000 / 15,000 = 1.13:1

Once we take into account his $13,000 owner’s draw, Bill’s owner’s equity comes to just $15,000, shy of his $17,000 in debt. Remember, an acceptable debt-to-equity ratio is 2:1. Bill is falling short of acceptable; if he had to pay off all his debts quickly, his equity wouldn’t cover it, and he’d need to dip into his company’s income. That makes his business unattractive to potential investors. Unless he changes course, Bill will have trouble getting financing for his business in the future.

Summary Analysis

Bill’s ratios don’t look great, but there’s hope. If he starts liquidating some of his long-term investments now, he can bump his current ratio up to 2:1, meaning he’d be in a healthy position to pay off liabilities with his current assets.

His quick ratio will take more work to improve. A lot of Bill’s assets are tied up in inventory. If he could convert some of that inventory to cash, he could improve his ability to pay of debt quickly in an emergency. He may want to take a look at his inventory, and see what he can liquidate. Maybe he’s got shelves full of books that have been gathering dust for years. If he can sell them off to another bookseller as a lot, maybe he can raise the $10,000 cash to become more financially stable.

Finally, unless he improves his debt-to-equity ratio, Bill’s brother Garth is the only person who will ever invest in his business. The situation could be improved considerably if Bill reduced his $13,000 owner’s draw. Unfortunately, he’s addicted to collecting extremely rare 18th century guides to bookkeeping. Until he can get his bibliophilia under control, his equity will continue to suffer.

Balance sheets can tell you a lot of information about your business, and help you plan strategically to make it more liquid, financially stable, and appealing to investors. But unless you use them in tandem with income statements and cash flow statements, you’re only getting part of the picture. Learn how they work together with our complete guide to financial statements .

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Balance Sheet: Definition, Uses and How to Create One

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The balance sheet summarizes your business's financial status as of a certain date. It follows the accounting equation: Assets = Liabilities + Owner's equity. In non-accounting terms, the balance sheet tells you what your business owns (assets), what it owes (liabilities), and what the owner's stake in the business is (equity).

If you think of your financial statements as the story of your business, then the balance sheet serves as the CliffsNotes version of that story. Every transaction in your business impacts the balance sheet in some way.

» MORE: Nine basic accounting concepts every business owner should know

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What does a balance sheet include?

The balance sheet includes three broad categories of information:

Liabilities.

Owner's equity.

Assets are the things your business owns. Most balance sheets break down assets into two subcategories.

Current assets are cash, cash equivalents, and things that can be easily converted into cash within the next 12 months. Your bank accounts, petty cash, accounts receivable (amounts customers owe to you), and inventory are all examples of current assets.

Fixed assets are things your business owns that aren't likely to be converted into cash (sold) within a 12-month period. This includes land, buildings, heavy equipment, vehicles, and long-term loans to customers. Some businesses also have intangible assets, like trademarks and patents, listed under fixed assets on their balance sheets.

Liabilities

Liabilities are amounts your business owes to others. As with assets, most balance sheets break down liabilities into two subcategories.

Current liabilities are amounts you are likely to pay within the next 12 months. This includes amounts due to vendors for utilities and inventory (accounts payable), credit card balances, sales tax and payroll taxes you've collected but not yet submitted to the government, and the portion of loan balances due within the next 12 months. In addition, if you have a line of credit for your business, that will usually be listed as a current liability on your balance sheet.

Long-term liabilities are amounts due in the future beyond the next 12 months. This would include the mortgage on your building, vehicle loans, and long-term leases.

Equity balances out the difference between assets and liabilities. It is your stake in the business. You can also look at equity as the amount the business owes to you.

Equity consists of:

Contributions you have made to the business (startup cash you invested, additional paid-in capital, etc.)

Retained earnings (amounts you have left in the business over time.)

Capital and preferred stock, if your business has other shareholders.

The current year's net income (from your profit and loss statement).

Let's look back at the accounting equation the balance sheet follows:

Assets = Liabilities + Equity.

Another way to look at this equation is

Assets - Liabilities = Equity.

In other words, equity is what is left for the business owner after all the liabilities are paid from the business's assets. Equity will be negative if a business's liabilities exceed its assets. This means the business owner might have to use their own money to pay the business's debts if it closes immediately. Negative equity can also negatively impact the selling price of the business.

» MORE: Best accounting software for small businesses

What does a balance sheet exclude?

The balance sheet excludes detailed information about the business's income and expenses. Instead, this detail is included in the business's profit and loss statement.

But remember: Every transaction in your business impacts the balance sheet in some way. Your business's income and expenses are summarized on the balance sheet as Net Income under the Equity section.

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How can you make a balance sheet?

If your business is new and simple, you can create a manual balance sheet using the accounting formula. First, list your current bank account balances (assets), subtract any loans or amounts due to others (liabilities), and what is left is your equity in the business.

However, most businesses must rely on their accounting software to create an accurate balance sheet. The balance sheet is a standard report in all double-entry bookkeeping software.

To create a balance sheet in your accounting software, go to the reports section and look for financial reports. Since it is a common financial statement, the balance sheet should appear near the top of the list, often right after the profit and loss (or income) statement.

Some accounting software prompts you to enter a date range for the balance sheet report. This isn't wrong, per se, but it can be confusing. Unlike the profit and loss statement, which only shows information for a certain period, the balance sheet shows information as of a specific date. And that information includes a financial summary of your business from its start through the "as of" date on the balance sheet.

The purpose of the balance sheet

Before the advent of double-entry bookkeeping software, the balance sheet ensured the accuracy of a business's bookkeeping. For example, if the balance sheet was out of balance — meaning assets weren't equal to the combined value of liabilities and equity — then that indicated an error in the books.

Today's accounting software won't let you post an unbalanced transaction, so finding an out-of-balance balance sheet is rare. In fact, an unbalanced balance sheet usually indicates a technical problem inside the software. But that doesn't mean the balance sheet is obsolete. On the contrary, the balance sheet is an essential tool to help you — and potential investors — analyze your company's health at a glance and make sound business decisions.

» MORE: Chart of accounts: Definition, guide and examples

How the balance sheet can help you make business decisions

You can quickly analyze your business's financial health with a glance at the balance sheet. If equity is negative — meaning liabilities are greater than assets — that could indicate your business is in financial trouble. It would be best to meet with an accountant to discuss ways to increase your assets or decrease your liabilities, so your stake in the business is no longer negative.

If you want to go beyond a glance, you can quickly calculate three critical metrics from your business's balance sheet.

Current ratio

The current ratio measures your business's ability to pay your current liabilities. The formula is:

Current assets / Current liabilities = Current ratio

The current ratio tells you how many times your business can pay its current liabilities from the cash on hand. Anything less than 1 indicates your business does not have enough cash or cash equivalents to pay amounts due in the next 12 months.

Quick ratio

The quick ratio formula is:

(Cash & cash equivalents + Short-term investments + Accounts receivable) / Current liabilities = Quick ratio

The quick ratio is a measure of liquidity and is often the same as the current ratio.

Debt to equity ratio

The debt-to-equity ratio tells you how leveraged your business is or how much of your business is financed with debt. The formula is:

Total liabilities / Total equity = Debt-to-equity ratio

Notice that now we're looking at total liabilities — including long-term debt. A good debt-to-equity ratio is between 1 and 1.5. Anything higher than that can indicate your business is highly leveraged. This could make it harder to get financing at a favorable rate.

Other considerations

These ratios are good quick measurements of your business's performance in certain critical areas, but they don't tell the whole story. To make the best decisions for your business, you should review the balance sheet alongside the profit and loss statement and statement of cash flows. Enlisting the help of an accountant who knows your business and your industry is also key to using your balance sheet to make business decisions.

On a similar note...

Business Plan Balance Sheet: Everything You Need to Know

Preparing a business plan balance sheet is an important part of starting your own business. 3 min read updated on September 19, 2022

Preparing a business plan balance sheet is an important part of starting your own business. The balance sheet serves as one of three crucial parts of the company's financials along with cash flow and the income statement. The basics of the balance sheet include a few straightforward parts:

• Company assets.
• Liabilities.
• Owner's equity.

The balance sheet will also include income and spending that isn't represented in the profit and loss statement. For example, it will show loan repayments and the purchase of new assets. Additionally, the money that is taken in as a new loan will not show up on the P & L either.

Accounts receivable, or the money you are waiting to receive from your customers, will show up as an asset on your balance sheet and as it is not yet reported as income on your P & L statement. A balance sheet is your business's representation of why your profits are not yet considered cash. It creates the broad financial picture of your business while the profit and loss statement will show the company's financial performance over a set length of time.

A balance sheet always has to balance. It will have assets on one side and liabilities and equity on the other. The basic formula that a balance sheet follows is Assets = Liabilities + Equity. In the end, it is the balance sheet that will show a company's net worth. To determine net worth at any given time, all you need to do is subtract the liabilities from the assets.

Balance sheets are used for planning and not accounting which is one of the principles of lean business planning. To get a useful cash flow projection, you will need to summarize the aggregate of the rows on the balance sheet. It is always important to look at a balance sheet as a tool to forecast your cash.

Components of a Balance Sheet

Just as one business will differ from another, so will the assets and liabilities of the business. Even though the titles will vary, the equation and goal remains the same. You will need to have your business assets equal your liabilities and equity .

The assets on your balance sheet will often be in order from the top to the bottom with how easy they can be converted to cash. This is called liquidity . Your most liquid assets will be on top and your least liquid on the bottom. Typically assets will be listed as follows:

• Cash — This is money currently on hands such as in checking and savings accounts. It can also include money market accounts that can be converted to cash quickly.
• Accounts Receivable — This represents money that is owed to you but has not actually been received yet. This is often credit that is extended to customers through invoicing.
• Inventory — This includes all the finished goods and materials that are ready at your place of business but has yet to be sold.
• Current Assets — These are assets that can be considered able to be converted into cash within a year or less. This includes all your cash, accounts receivable, and inventory which will all be grouped together as current assets.
• Long-Term Assets — These are fixed assets that have a long-standing value such as land and equipment. They cannot be converted to cash as quickly.
• Accumulated Depreciation — This is the value that your assets will be reduced over time due to depreciation.
• Long-Term Assets — This is the total of long-term assets plus depreciation.

Liabilities

Liabilities will be ordered for time it would take to pay them off, with current liabilities needing to be paid in a year or less and long-term liabilities longer than a year.

• Accounts Payable — This is the amount of money that your business will owe to vendors or for regular bills.
• Sales Tax Payable — If your sales tax is not paid right away, it will accrue in this account until payment is made.
• Short-Term Debt — This is usually short-term loans that will be repaid in less than a year.
• Total Current Liabilities — The total amount of debt that the business will need to pay back in a year.
• Long-Term Debt — This amount includes the financial responsibilities that will take more than a year to pay back.

If you need help with a business plan balance sheet, you can post your legal need on UpCounsel's marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.

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Balance Sheet – Definition, Example, Formula & Components

A balance sheet is a financial statement that contains details of a company’s assets or liabilities at a specific point in time. It is one of the three core financial statements ( income statement  and  cash flow statement  being the other two) used for evaluating the performance of a business.

A balance sheet serves as reference documents for investors and other stakeholders to get an idea of the financial health of an organization. It enables them to compare current assets and liabilities to determine the business’s liquidity, or calculate the rate at which the company generates returns. Comparing two or more balance sheets from different points in time can also show how a business has grown.

With this information, stakeholders can also understand the company’s prospects. For instance, the balance sheet can be used as proof of creditworthiness when the company is applying for loans. By seeing whether current assets are greater than current liabilities, creditors can see whether the company can fulfill its short-term obligations and how much financial risk it is taking.

Balance sheet example with sample format

 A balance sheet depicts many accounts, categorized under assets and liabilities. Like any other financial statement, a balance sheet will have minor variations in structure depending on the organization. Following is a sample balance sheet, which shows all the basic accounts classified under assets and liabilities so that both sides of the sheet are equal.

Key elements & components of a balance sheet

 A balance sheet consists of two main headings: assets and liabilities. Let us take a detailed look at these components.

An asset is something that the company owns and that is beneficial for the growth of the business. Assets can be classified based on convertibility, physical existence, and usage. 

a.  Convertibility : This describes whether the asset can be easily converted to cash. Based on convertibility, assets are further classified into current assets and fixed assets.

Current assets : Assets which can be easily converted into cash or cash equivalents within a duration of one year. Examples include short-term deposits, marketable securities, and stock.

Fixed assets : Assets which cannot be easily or readily converted to cash. For example, buildings, machinery, equipment, or trademarks.

b.  Physical existence : Assets can be of two types, tangible and intangible.

Tangible assets : Assets which you can see and feel, like office supplies, machinery, equipment, and buildings.

Intangible assets : Assets which do not have physical existence, like patents, brands, and copyrights.

 c.  Usage : Assets can be classified as operating and non-operating assets.

Operating assets : Assets which are necessary to conduct business operations. For example, buildings, machinery, and equipment.

Non-operating assets : Short-term investments or marketable securities that are not necessary for daily operations.

Liabilities

Liabilities are what the company owes to other parties. This includes debts and other financial obligations that arise as an outcome of business transactions. Companies settle their liabilities by paying them back in cash or providing an equivalent service to the other party. Liabilities are listed on the right side of the balance sheet.

 Depending on context, liabilities can be classified as current and non-current.

1.  Current liabilities : These include debts or obligations that have to be fulfilled within a year. Current liabilities are also called short-term assets, and they include accounts payable, interest payable, and short-term loans.

2.  Non-current liabilities : These are debts or obligations for which the due date is more than a year. Non-current liabilities, also called long-term liabilities, include bonds payable, long-term notes payable, and deferred tax liabilities.

Owner’s Equity/ Earnings

Owner’s equity is equal to total assets minus total liabilities. In other words, it is the amount that can be handed over to shareholders after the debts have been paid and the assets have been liquidated. Equity is one of the most common ways to represent the net value of the company. Part of shareholder’s equity is retained earnings, which is a fixed percentage of the shareholder’s equity that has to be paid as dividends.

The equity value can be positive or negative. If the shareholder’s equity is positive, then the company has enough assets to pay off its liabilities. If it is negative, then liabilities exceed assets.

General sequence of accounts in a balance sheet

 According to Generally Accepted Accounting Principles (GAAP), current assets must be listed separately from liabilities. Likewise, current liabilities must be represented separately from long-term liabilities. Current asset accounts include cash, accounts receivable, inventory, and prepaid expenses, while long-term asset accounts include long-term investments, fixed assets, and intangible assets.

Under your current liability accounts, you can have long-term debt, interest payable, salaries, and customer payments, while long-term liabilities include long-term debts, pension fund liability, and bonds payable.

Asset accounts will be noted in descending order of maturity, while liabilities will be arranged in ascending order. Under shareholder’s equity, accounts are arranged in decreasing order of priority.

Balance sheet formula & equation

The balance sheet equation follows the accounting equation, where assets are on one side, liabilities and shareholder’s equity are on the other side, and both sides balance out.

Assets = Liabilities + Shareholder’s Equity

 According to the equation, a company pays for what it owns (assets) by borrowing money as a service (liabilities) or taking from the shareholders or investors (equity).

A balance sheet is an important reference document for investors and stakeholders for assessing a company’s financial status. This document gives detailed information about the assets and liabilities for a given time. Using these details one can understand about company’s performance. By analysing balance sheet, company owners can keep their business on a good financial footing.

Now that you have an idea of how values are recorded in several accounts in a balance sheet, you can take a closer look with an example of  how to read a balance sheet . In this article, we will discuss different scenarios to understand how values are reflected in the balance sheet accounts.

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What is the Balance Sheet?

Balance sheet example, download the free template, how the balance sheet is structured, how is the balance sheet used in financial modeling, importance of the balance sheet, video explanation of the balance sheet, learn more about the financial statements, balance sheet.

Assets = Liabilities + Shareholders' Equity

The balance sheet is one of the three fundamental financial statements  and is key to both financial modeling and accounting. The balance sheet displays the company’s total assets and how the assets are financed, either through either debt or equity. It can also be referred to as a statement of net worth or a statement of financial position. The balance sheet is based on the fundamental equation: Assets = Liabilities + Equity .

Image: CFI’s Financial Analysis Course

As such, the balance sheet is divided into two sides (or sections). The left side of the balance sheet outlines all of a company’s assets . On the right side, the balance sheet outlines the company’s liabilities and shareholders’ equity .

T he assets and liabilities are separated into two categories: current asset/liabilities and non-current (long-term) assets/liabilities. More liquid accounts, such as Inventory, Cash, and Trades Payables, are placed in the current section before illiquid accounts (or non-current) such as Plant, Property, and Equipment (PP&E) and Long-Term Debt.

Below is an example of Amazon’s 2017 balance sheet taken from CFI’s Amazon Case Study Course .  As you will see, it starts with current assets, then non-current assets, and total assets.  Below that are liabilities and stockholders’ equity, which includes current liabilities, non-current liabilities, and finally shareholders’ equity.

View Amazon’s investor relations website to view the full balance sheet and annual report.

Enter your name and email in the form below and download the free template now! You can use the Excel file to enter the numbers for any company and gain a deeper understanding of how balance sheets work.

Balance sheets, like all financial statements, will have minor differences between organizations and industries. However, there are several “buckets” and line items that are almost always included in common balance sheets. We briefly go through commonly found line items under Current Assets, Long-Term Assets, Current Liabilities, Long-term Liabilities, and Equity.

Learn the basics in CFI’s Free Accounting Fundamentals Course .

Current Assets

Cash and equivalents.

The most liquid of all assets, cash, appears on the first line of the balance sheet. Cash Equivalents are also lumped under this line item and include assets that have short-term maturities under three months or assets that the company can liquidate on short notice, such as marketable securities . Companies will generally disclose what equivalents it includes in the footnotes to the balance sheet.

Accounts Receivable

This account includes the balance of all sales revenue still on credit, net of any allowances for doubtful accounts (which generates a bad debt expense). As companies recover accounts receivables, this account decreases, and cash increases by the same amount.account

Inventory includes amounts for raw materials, work-in-progress goods, and finished goods. The company uses this account when it reports sales of goods, generally under cost of goods sold in the income statement.

Non-Current Assets

Plant, property, and equipment (pp&e).

Property, Plant, and Equipment (also known as PP&E) capture the company’s tangible fixed assets. The line item is noted net of accumulated depreciation. Some companies will class out their PP&E by the different types of assets, such as Land, Building, and various types of Equipment. All PP&E is depreciable except for Land.

Intangible Assets

This line item includes all of the company’s intangible fixed assets, which may or may not be identifiable. Identifiable intangible assets include patents, licenses, and secret formulas. Unidentifiable intangible assets include brand and goodwill.

• Current Liabilities

Accounts Payable

Accounts Payables, or AP, is the amount a company owes suppliers for items or services purchased on credit. As the company pays off its AP, it decreases along with an equal amount decrease to the cash account.

Current Debt/Notes Payable

Includes non-AP obligations that are due within one year’s time or within one operating cycle for the company (whichever is longest). Notes payable may also have a long-term version, which includes notes with a maturity of more than one year.

Current Portion of Long-Term Debt

This account may or may not be lumped together with the above account, Current Debt. While they may seem similar, the current portion of long-term debt is specifically the portion due within this year of a piece of debt that has a maturity of more than one year. For example, if a company takes on a bank loan to be paid off in 5-years, this account will include the portion of that loan due in the next year.

Non-Current Liabilities

Bonds payable.

This account includes the amortized amount of any bonds the company has issued.

Long-Term Debt

This account includes the total amount of long-term debt (excluding the current portion, if that account is present under current liabilities). This account is derived from the debt schedule , which outlines all of the company’s outstanding debt, the interest expense, and the principal repayment for every period.

Shareholders’ Equity

Share capital.

This is the value of funds that shareholders have invested in the company. When a company is first formed, shareholders will typically put in cash. For example, an investor starts a company and seeds it with $10M. Cash (an asset) rises by $10M, and Share Capital (an equity account) rises by $10M, balancing out the balance sheet.

Retained Earnings

This is the total amount of net income the company decides to keep. Every period, a company may pay out dividends from its net income. Any amount remaining (or exceeding) is added to (deducted from) retained earnings.

This statement is a great way to analyze a company’s financial position . An analyst can generally use the balance sheet to calculate a lot of financial ratios that help determine how well a company is performing, how liquid or solvent a company is, and how efficient it is.

Changes in balance sheet accounts are also used to calculate cash flow in the cash flow statement . For example, a positive change in plant, property, and equipment is equal to capital expenditure minus depreciation expense. If depreciation expense is known, capital expenditure can be calculated and included as a cash outflow under cash flow from investing in the cash flow statement.

Screenshot from CFI’s Financial Analysis Course .

The balance sheet is a very important financial statement for many reasons.  It can be looked at on its own and in conjunction with other statements like the income statement and cash flow statement to get a full picture of a company’s health.

Four important financial performance metrics include:

• Liquidity – Comparing a company’s current assets to its current liabilities provides a picture of liquidity.  Current assets should be greater than current liabilities, so the company can cover its short-term obligations. The Current Ratio and Quick Ratio are examples of liquidity financial metrics.
• Leverage – Looking at how a company is financed indicates how much leverage it has, which in turn indicates how much financial risk the company is taking. Comparing debt to equity and debt to total capital are common ways of assessing leverage on the balance sheet.
• Efficiency – By using the income statement in connection with the balance sheet, it’s possible to assess how efficiently a company uses its assets.  For example, dividing revenue by the average total assets produces the Asset Turnover Ratio to indicate how efficiently the company turns assets into revenue. Additionally, the working capital cycle shows how well a company manages its cash in the short term.
• Rates of Return – The balance sheet can be used to evaluate how well a company generates returns. For example, dividing net income by shareholders’ equity produces Return on Equity (ROE), and dividing net income by total assets produces Return on Assets (ROA), and dividing net income by debt plus equity results in Return on Invested Capital (ROIC).

All of the above ratios and metrics are covered in detail in CFI’s Financial Analysis Course .

Below is a video that quickly covers the key concepts outlined in this guide and the main things you need to know about a balance sheet, the items that make it up, and why it matters.

As discussed in the video, the equation Assets = Liabilities + Shareholders’ Equity  must always be satisfied!

To continue learning and advancing your career as a financial analyst, these additional CFI resources will be helpful:

• Free Accounting Fundamentals Course
• Income Statement
• Three Financial Statements
• Three Financial Statement Model
• See all accounting resources
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Balance Sheets 101: What Goes On a Balance Sheet?

• 09 Jun 2016

A balance sheet is one of the primary statements used to determine the net worth of a company and get a quick overview of its financial health. The ability to read and understand a balance sheet is a crucial skill for anyone involved in business, but it’s one that many people lack.

What Is a Balance Sheet?

A balance sheet provides a snapshot of a company’s financial performance at a given point in time. This financial statement is used both internally and externally to determine the so-called “book value” of the company, or its overall worth.

Balance sheets are typically prepared and distributed monthly or quarterly depending on the governing laws and company policies. Additionally, the balance sheet may be prepared according to GAAP or IFRS standards based on the region in which the company is located.

The balance sheet is just a more detailed version of the fundamental accounting equation—also known as the balance sheet formula—which includes assets , liabilities , and shareholders’ equity .

The Balance Sheet Equation

Balance sheets are typically organized according to the following formula:

Assets = Liabilities + Owners’ Equity

The formula can also be rearranged like so:

Owners’ Equity = Assets - Liabilities or Liabilities = Assets - Owners’ Equity

A balance sheet must always balance; therefore, this equation should always be true.

You’ve probably heard at least some of these terms before. But what do they actually mean and include? Let’s break it down. Below, we’ll explore what exactly goes on a balance sheet.

What Goes on a Balance Sheet?

The assets are the operational side of the company. Basically, a list of what the company owns . Everything listed is an item that the company has control over and can use to run the business.

The left side of the balance sheet is the business itself, including the buildings, inventory for sale, and cash from selling goods. If you were to take a clipboard and record everything you found in a company, you would end up with a list that looks remarkably like the left side of the balance sheet. The assets are what allow the company to run.

Assets can be further categorized as either current assets or fixed (non-current) assets. Some of the most common current assets include:

• Cash and cash equivalents
• Accounts receivable
• Short-term marketable securities

Common fixed or non-current assets include:

• Property and equipment
• Long-term marketable securities
• Intangible assets such as patents, licenses, and goodwill

Assets will typically be presented as individual line items, such as the examples above. Then, current and fixed assets are subtotaled and finally totaled together.

2. Liabilities

Liabilities and equity make up the right side of the balance sheet and cover the financial side of the company. This is a list of what the company owes. With liabilities, this is obvious—you owe loans to a bank, or repayment of bonds to holders of debt. The interest rates are fixed and the amounts owed are clear. Liabilities are listed at the top of the balance sheet because, in case of bankruptcy, they are paid back first before any other funds are given out.

Similar to assets, liabilities are categorized as current and non-current liabilities. Common current liabilities include:

• Accounts payable
• Salaries and wages payable
• Deferred revenue
• Commercial paper
• Accrued expenses
• Short-term debt

Non-current liabilities include:

• Long-term debt
• Long-term lease obligations

Liabilities are presented as line items, subtotaled, and totaled on the balance sheet.

Below liabilities on the balance sheet is equity, or the amount owed to the owners of the company. Since they own the company, this amount is intuitively based on the accounting equation—whatever assets are left over after the liabilities have been accounted for must be owned by the owners, by equity. These are listed at the bottom of the balance sheet because the owners are paid back after all liabilities have been paid.

Unlike liabilities, equity is not a fixed amount with a fixed interest rate. Any time the value of assets change—perhaps you receive more in cash from a sale than the value of the inventory you sold, or you were forced to write down a truck that was involved in a collision and no longer works—the value of equity changes.

Because the value of liabilities is constant, all changes to assets must be reflected with a change in equity. This is also why all revenue and expense accounts are equity accounts, because they represent changes to the value of assets.

Common line items in the equity section of the balance sheet include:

• Common stock
• Preferred stock
• Treasury stock
• Retained earnings

Together, these line items make up total shareholders’ equity.

To recap, you’ll find the assets (what’s owned) on the left of the balance sheet, liabilities (what’s owed) and equity (the owners’ share) on the right, and the two sides remain balanced by adjusting the value of equity.

The Language of Business

It’s commonly held that accounting is the language of business. Understanding and analyzing key financial statements like the balance sheet , income statement, and cash flow statement is critical to painting a clear picture of a business’s past, present, and future performance. Knowing what goes into preparing these documents can also be insightful.

On a more granular level, the fundamentals of financial accounting can shed light on the performance of individual departments, teams, and projects. Whether you’re looking to understand your company’s balance sheet or create one yourself, the information you’ll glean from doing so can help you make better business decisions in the long run.

Want to learn more about what’s behind the numbers on financial statements? Explore our eight-week online course Financial Accounting —one of our online finance and accounting courses —to learn the key financial concepts you need to understand business performance and potential.

(This post was updated on January 31, 2023. It was originally published on June 9, 2016.)

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What Is a Business Plan?

Understanding business plans, how to write a business plan, common elements of a business plan, the bottom line, business plan: what it is, what's included, and how to write one.

Adam Hayes, Ph.D., CFA, is a financial writer with 15+ years Wall Street experience as a derivatives trader. Besides his extensive derivative trading expertise, Adam is an expert in economics and behavioral finance. Adam received his master's in economics from The New School for Social Research and his Ph.D. from the University of Wisconsin-Madison in sociology. He is a CFA charterholder as well as holding FINRA Series 7, 55 & 63 licenses. He currently researches and teaches economic sociology and the social studies of finance at the Hebrew University in Jerusalem.

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A business plan is a document that outlines a company's goals and the strategies to achieve them. It's valuable for both startups and established companies. For startups, a well-crafted business plan is crucial for attracting potential lenders and investors. Established businesses use business plans to stay on track and aligned with their growth objectives. This article will explain the key components of an effective business plan and guidance on how to write one.

Key Takeaways

• A business plan is a document detailing a company's business activities and strategies for achieving its goals.
• Startup companies use business plans to launch their venture and to attract outside investors.
• For established companies, a business plan helps keep the executive team focused on short- and long-term objectives.
• There's no single required format for a business plan, but certain key elements are essential for most companies.

Investopedia / Ryan Oakley

Any new business should have a business plan in place before beginning operations. Banks and venture capital firms often want to see a business plan before considering making a loan or providing capital to new businesses.

Even if a company doesn't need additional funding, having a business plan helps it stay focused on its goals. Research from the University of Oregon shows that businesses with a plan are significantly more likely to secure funding than those without one. Moreover, companies with a business plan grow 30% faster than those that don't plan. According to a Harvard Business Review article, entrepreneurs who write formal plans are 16% more likely to achieve viability than those who don't.

A business plan should ideally be reviewed and updated periodically to reflect achieved goals or changes in direction. An established business moving in a new direction might even create an entirely new plan.

There are numerous benefits to creating (and sticking to) a well-conceived business plan. It allows for careful consideration of ideas before significant investment, highlights potential obstacles to success, and provides a tool for seeking objective feedback from trusted outsiders. A business plan may also help ensure that a company’s executive team remains aligned on strategic action items and priorities.

While business plans vary widely, even among competitors in the same industry, they often share basic elements detailed below.

A well-crafted business plan is essential for attracting investors and guiding a company's strategic growth. It should address market needs and investor requirements and provide clear financial projections.

While there are any number of templates that you can use to write a business plan, it's best to try to avoid producing a generic-looking one. Let your plan reflect the unique personality of your business.

Many business plans use some combination of the sections below, with varying levels of detail, depending on the company.

The length of a business plan can vary greatly from business to business. Regardless, gathering the basic information into a 15- to 25-page document is best. Any additional crucial elements, such as patent applications, can be referenced in the main document and included as appendices.

Common elements in many business plans include:

• Executive summary : This section introduces the company and includes its mission statement along with relevant information about the company's leadership, employees, operations, and locations.
• Products and services : Describe the products and services the company offers or plans to introduce. Include details on pricing, product lifespan, and unique consumer benefits. Mention production and manufacturing processes, relevant patents , proprietary technology , and research and development (R&D) information.
• Market analysis : Explain the current state of the industry and the competition. Detail where the company fits in, the types of customers it plans to target, and how it plans to capture market share from competitors.
• Marketing strategy : Outline the company's plans to attract and retain customers, including anticipated advertising and marketing campaigns. Describe the distribution channels that will be used to deliver products or services to consumers.
• Financial plans and projections : Established businesses should include financial statements, balance sheets, and other relevant financial information. New businesses should provide financial targets and estimates for the first few years. This section may also include any funding requests.

Investors want to see a clear exit strategy, expected returns, and a timeline for cashing out. It's likely a good idea to provide five-year profitability forecasts and realistic financial estimates.

2 Types of Business Plans

Business plans can vary in format, often categorized into traditional and lean startup plans. According to the U.S. Small Business Administration (SBA) , the traditional business plan is the more common of the two.

• Traditional business plans : These are detailed and lengthy, requiring more effort to create but offering comprehensive information that can be persuasive to potential investors.
• Lean startup business plans : These are concise, sometimes just one page, and focus on key elements. While they save time, companies should be ready to provide additional details if requested by investors or lenders.

Why Do Business Plans Fail?

A business plan isn't a surefire recipe for success. The plan may have been unrealistic in its assumptions and projections. Markets and the economy might change in ways that couldn't have been foreseen. A competitor might introduce a revolutionary new product or service. All this calls for building flexibility into your plan, so you can pivot to a new course if needed.

How Often Should a Business Plan Be Updated?

How frequently a business plan needs to be revised will depend on its nature. Updating your business plan is crucial due to changes in external factors (market trends, competition, and regulations) and internal developments (like employee growth and new products). While a well-established business might want to review its plan once a year and make changes if necessary, a new or fast-growing business in a fiercely competitive market might want to revise it more often, such as quarterly.

What Does a Lean Startup Business Plan Include?

The lean startup business plan is ideal for quickly explaining a business, especially for new companies that don't have much information yet. Key sections may include a value proposition , major activities and advantages, resources (staff, intellectual property, and capital), partnerships, customer segments, and revenue sources.

A well-crafted business plan is crucial for any company, whether it's a startup looking for investment or an established business wanting to stay on course. It outlines goals and strategies, boosting a company's chances of securing funding and achieving growth.

As your business and the market change, update your business plan regularly. This keeps it relevant and aligned with your current goals and conditions. Think of your business plan as a living document that evolves with your company, not something carved in stone.

University of Oregon Department of Economics. " Evaluation of the Effectiveness of Business Planning Using Palo Alto's Business Plan Pro ." Eason Ding & Tim Hursey.

Bplans. " Do You Need a Business Plan? Scientific Research Says Yes ."

Harvard Business Review. " Research: Writing a Business Plan Makes Your Startup More Likely to Succeed ."

Harvard Business Review. " How to Write a Winning Business Plan ."

U.S. Small Business Administration. " Write Your Business Plan ."

SCORE. " When and Why Should You Review Your Business Plan? "

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What Is a Balance Sheet?

Definition & Example of a Balance Sheet

Susan Ward wrote about small businesses for The Balance for 18 years. She has run an IT consulting firm and designed and presented courses on how to promote small businesses.

How a Balance Sheet Works

Sample balance sheet, do i need a balance sheet.

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A balance sheet is a statement of the financial position of a business that lists the assets, liabilities, and owners' equity at a particular point in time. In other words, the balance sheet illustrates a business's net worth.

Learn more about what a balance sheet is, how it works, if you need one, and also see an example.

The balance sheet is the most important of the three main financial statements used to illustrate the financial health of a business. The other two are the income statement and cash flow statement.

A balance sheet helps business stakeholders and analysts evaluate the overall financial position of a company and its ability to pay for its operating needs. You can also use the balance sheet to determine how to meet your financial obligations and the best ways to use credit to finance your operations. 

The balance sheet may also have details from previous years so you can do a back-to-back comparison of two consecutive years. This data will help you track your performance and identify ways to build up your finances and see where you need to improve. 

Alternate name: Statement of financial position

It's a good idea to have an accountant do your first balance sheet, particularly if you're new to business accounting. A few hundred dollars of an accountant's time may pay for itself by avoiding issues with the tax authorities. You may also want to review the balance sheet with your accountant after any major changes to your business.

All accounts in your general ledger are categorized as an asset , a liability, or equity. The items listed on balance sheets can vary depending on the industry, but in general, the sheet is divided into these three categories.

Assets are typically organized into liquid assets, or those that are cash or can be easily converted into cash, and non-liquid assets that cannot quickly be converted to cash, such as land, buildings, and equipment. They may also include intangible assets, such as franchise agreements, copyrights, and patents.  

Liabilities

Liabilities are funds owed by the business and are broken down into current and long-term categories. Current liabilities are those due within one year and include items such as accounts payable (supplier invoices), wages, income tax deductions, pension plan contributions, medical plan payments, building and equipment rents, customer deposits (advance payments for goods or services to be delivered), utilities, temporary loans, lines of credit, interest, maturing debt, and sales tax and/or goods, and services tax charged on purchases.  

Long-term liabilities are any that are due after a one-year period. These may include deferred tax liabilities, any long-term debt such as interest and principal on bonds, and any pension fund liabilities.   

Equity, also known as owners' equity or shareholders' equity, is that which remains after subtracting the liabilities from the assets. Retained earnings are earnings retained by the corporation—that is, not paid to shareholders in the form of dividends.

Retained earnings are used to pay down debt or are otherwise reinvested in the business to take advantage of growth opportunities. While a business is in a growth phase, retained earnings are typically used to fund expansion rather than paid out as dividends to shareholders.  

COMPANY NAME BALANCE SHEET as at __________ (Date)

An up-to-date and accurate balance sheet is essential for a business owner looking for additional debt or equity financing, or who wishes to sell the business and needs to determine its net worth.

Incorporated businesses are required to include balance sheets, income statements, and cash flow statements in financial reports to shareholders and tax and regulatory authorities.   Preparing balance sheets is optional for sole proprietorships and partnerships, but it's useful for monitoring the health of the business.

Key Takeaways

• Balance sheets are an important tool for assessing and monitoring the financial health of a business.
• They typically include assets, liabilities, and owners' equity.
• The U.S. government requires incorporated businesses to have balance sheets.

U.S. Securities and Exchange Commission. " Beginners' Guide to Financial Statement ." Accessed June 20, 2020.

QuickBooks. " What Are Current Liabilities? – Definition and Example ." Accessed June 20, 2020.

FreshBooks. " What Is Liability in Accounting? " Accessed June 20, 2020.

Corporate Finance Institute. " Retained Earnings ." Accessed June 20, 2020.

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Balance Sheet Example Download

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The balance sheet is one of the key financial statements that you should review regularly—at least once a month.

Balance sheet definition

Your balance sheet shows the current financial state of your company and summarizes what you own (your assets), what you owe (your liabilities), and the money you’ve invested into your business, plus profits (your equity).

Unlike the other two primary financial statements (your profit and loss and cash flow statement) which span a period of time such as a month, quarter, or year, the balance sheet tells you how your business is doing at a specific point in time.

Having an accurate balance sheet is fundamental to every business. It is the primary document an investor or lender will want to see to understand your business’s health and value. When you review it regularly, it also provides some key information that will help you make better strategic spending and growth decisions.

Balance sheet formula

The balance sheet always has to balance—as the name suggests—with assets (like cash and inventory) on one side, and liabilities (like accounts payable) and equity on the other.

The formula for every balance sheet is: 

Assets = Liabilities + Equity

Balance sheet analysis: How to read and understand it

Regularly reviewing your balance sheet—also called  balance sheet analysis —will help you spot potential cash issues, and understand the state of your business’s investing and financing activities, whether you’re seeking funding from lenders or investors, or you’re trying to make smart growth decisions. 

There are also a number of useful ratios you can pull from balance sheet data that help you gauge your cash on hand against your financial obligations, and help you compare your business’s health with industry benchmarks.

To learn more about what a balance sheet is and what it can tell you about the current state of your business, check out this article:  What Is a Balance Sheet, and How Do You Read It?

Want us to create your balance sheet for you?

If you need more help creating your balance sheet,  take a look at LivePlan . It’s a simple tool for planning, forecasting, and tracking your business performance.

With LivePlan, you can easily create complete financial statements without any prior business knowledge. LivePlan walks you step by step through the process—no formulas or messy spreadsheets, and no accounting knowledge required. Plus, you’ll get our world-class phone and email support to help you along the way.

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What is a balance sheet and why is it important?

Cnbc select talks about what a balance sheet is and it's utility as a financial statement.

A balance sheet is a versatile document that offers a snapshot of a company's or individual's finances at a given point in time. Businesses can use balance sheets to develop plans for the future and present a picture of their financial health to investors or other outside entities. You can also generate a personal balance sheet to get a concise view of your assets and liabilities. Here, CNBC Select explains what a balance sheet is, how to create one and how it can be useful to both companies and individuals.

What we'll cover

What is a balance sheet.

• How a balance sheet works

Why balance sheets are important

How to make a personal balance sheet, bottom line.

A balance sheet, also known as a statement of net worth , is a summary of a company's financial status at a specific point in time. It presents all assets and liabilities, as well as any investments from shareholders. It is one of the three primary financial statements all companies are required to have by law, along with an income statement and a statement of cash flows.

Because it uses archival data, a balance sheet only presents a snapshot of a company's financial situation. While it's a critical tool, it can't guarantee future performance.

How does a balance sheet work?

A balance sheet uses a formula that equates a company's assets with its liabilities plus its shareholder equity. The equation should always be in "balance," with the two sides equal. Here's what each aspect of the balance sheet equation represents:

• Assets: Assets are resources with quantifiable value, such as cash, inventory or money the company is owed. They are often split into current assets — bank accounts, inventory and other things that could easily be converted into cash — and fixed assets — buildings, machinery, long-term loans to customers and other things that will stay on the books longer. (Intellectual property can also be included as a fixed asset.)
• Liabilities: Essentially the opposite of an asset, a liability is something the company owes, usually a sum of money. They are divided into short-term liabilities — like salaries, rent and money owed to other companies — and long-term liabilities , like mortgages, larger loans and long-term leases.
• Shareholder equity: This is a company's net worth — essentially what would be left if the business had to liquidate its assets and pay off all its debts. It most commonly takes the form of stocks and retained earnings (money the company earned but hasn't distributed to investors), but also includes any capital investments. Analysts and investors can use shareholder equity to judge a company's financial well-being.

While there can be nuances regarding the classification of certain assets or liabilities, a balance sheet is still a good way to determine a company's financial health at a given point in time.

In a corporation, a balance sheet lets stakeholders know if the business is solvent, meaning the value of its assets is higher than the total of its liabilities. It can also pinpoint areas where the company is underperforming.

Externally, a balance sheet lets potential investors, clients and other businesses know if a company is solvent. Did it borrow more money than it should have? Are its liabilities higher than the industry average? Is the available cash on hand higher or lower than normal? While you'll most often hear about balance sheets in the context of business, they can also help individuals take stock of their finances and make informed purchasing and investing decisions.

You can also use a balance sheet to quickly determine several key financial measurements:

• The current ratio , the current assets divided by current liabilities, illustrates a company's ability to pay off debts over the next 12 months.
• A quick ratio indicates a company's ability to pay off debt right away. It's determined by dividing liquid assets (cash/cash equivalents + short-term investments + accounts receivable) by current liabilities. The quick ratio is often the same as the current ratio.
• There is also the debt-to-equity ratio , or "risk ratio." It's a company's total liabilities divided by its total equity. This metric reveals how much of a business is financed by debt. If a company is highly leveraged, it can make it hard to get additional financing.

The formula for a personal balance sheet is similar to one for a business, only without shareholder equity. Essentially, your net worth is equal to your assets minus your liabilities, or debts. To create a personal balance sheet, start by collecting relevant financial records from your bank, investment companies and creditors. Using a personal finance app, such as You Need A Budget (YNAB) , can be helpful during this kind of deep dive. YNAB syncs with your bank and investment accounts, allowing you to assign funds to different life categories to better help you visualize your finances.

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Now, tally up your assets. This includes money in checking accounts , savings accounts and retirement funds, as well as your car or home (if you own them outright) and valuables like jewelry, art or collectibles. Then work on identifying your liabilities, or outstanding debts. Common ones include mortgages, student loans, car payments and credit card bills.

Once you've listed both, subtract your liabilities from your assets. The resulting figure is your net worth. If the amount is lower than you would like, or even negative, remember that this is just a snapshot of your current status. You now have information that can help you address your financial situation.

For instance, if you see you've accumulated a substantial amount of credit card debt , you could consider applying for a balance transfer credit card like the Wells Fargo Reflect® Card , which has a 0% intro APR for 21 months from account opening on purchases and qualifying balance transfers. Balance transfers made within 120 days qualify for the intro rate, BT fee of 5%, min: $5. If you kept up with payments, you could chip away at your debt without being buried under a high interest rate.

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Who needs a balance sheet?

A balance sheet is a key financial tool for business owners, executives, analysts and anyone who wants a clear picture of a company's current monetary position.

What does a balance sheet show?

A balance sheet gives an overview of a company's financial position by taking stock of what it owns, what it owes and the value of its equity.

What doesn't appear on a balance sheet?

There are a few things a balance sheet won't show you, including cash flow, profits and losses and the fair market value of assets such as land.

Can a balance sheet be negative?

A balance sheet can contain negative values, most commonly when a business is spending more than it is making. But the basic formula — assets = liabilities + shareholders' equity — should always balance out.

Money matters — so make the most of it. Get expert tips, strategies, news and everything else you need to maximize your money, right to your inbox.  Sign up here .

Businesses use balance sheets to indicate their financial standing. They can also be used by individuals or households to get a high-level view of their current wealth and identify areas for improvement.

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Balance Sheet: Definition, Analysis and Creation Best Practices

By Colin Higginbotham , TD In-Store Small Business Lead Monté Foster , TD SVP, Retail and Small Business Banking

Maintaining a detailed balance sheet is important to keeping track of accurate accounting—of your company's assets, liabilities and equity. It's one of the essential documents every small business should have, as it can provide a snapshot into your strengths and opportunities for improvement. Explore the article's main topics and content:

• How to create and structure a balance sheet
• Download a balance sheet template
• Five elements of a balance sheet defined
• Analyzing a balance sheet

What is a balance sheet?

A balance sheet is a key financial statement that represents a company's financial status at any given point in time, capturing the company's assets, liabilities, and equity in a single document. When used together with the  income statement ,  cash flow statement , and  owner's equity statement , the balance sheet can help assess the overall financial health of a business.

Why should a business create a balance sheet?

As an essential tool in showcasing a company's or organization's short-term financial stability and standing, the balance sheet can be used to help:

• Determine a business's ability to pay debts or expenses
• Confirm current levels of cash on hand for attracting potential investors

How to create and structure a balance sheet

Balance sheets are usually created using this basic formula: Assets = Liabilities + Equity. The overall assets of a company (what it has or is owed) are "balanced" by the company's liabilities (what it owes) plus its equity.

A typical balance sheet will be structured in such a way as to capture the company's assets in the top section and the liabilities and equity in the bottom section, with assets and liabilities divided into both current and non-current.

Following is an example of a simple balance sheet and definition of terms.

Balance Sheet Statement

As of <insert date>

It's a good idea to indicate the date and time on the document. The number of line items under assets, liabilities and equity will vary based on the business and what is involved in its day-to-day operations. For example, retail companies may have inventory costs while service-based businesses may not.

Go to Microsoft Office to download a free balance sheet template.

The five elements of a balance sheet defined.

1. Current assets

Current assets are assets that can be converted into cash-on-hand within one year. The most accessible form of this is cash from bank accounts and check deposits. Cash is common with current assets, and you would use cash at the end of the period from your  statement of cash flows .

Accounts receivable and working inventory are other examples of current assets. Accounts receivable are debts owed to the business by outside parties or clients. Inventory is any form of raw materials as well as finished and unfinished products that are sold to clients and customers.

2. Non-current assets Non-current assets are assets that cannot be easily converted into cash within a year. This would include business-related products and properties such as physical offices, real estate owned, technology, and machinery or equipment on site. Patents and copywritten products would also fall into this category.

3. Current liabilities Like assets, current liabilities are debts or expenses due to be paid within a year's timeframe. Accounts payable, bank loans and lines of credit, and employee salaries are good examples of current liabilities.

Accounts payable are accounts that a business owes to outside clients. Bank loans are business liens that are placed through financial institutions with the purpose of borrowing for business capital.

4. Non-current liabilities Non-current liabilities, or long-term liabilities, are liabilities that need to be paid after a year or 12-month timeframe. Real estate loans, vehicle loans and equipment leases are considered non-current. Payments made on liens within those 12 months are considered current liabilities, with the loan balances and payoff options being listed as a non-current liability.

5. Owner's equity Owner's equity  is what is left over after subtracting assets from liabilities. For most businesses, equity is made up of retained earnings, which is income that belongs to the company. Positive retained earnings mean the business is profitable and in good financial shape. Negative retained earnings can mean the business is in financial distress.

Owner's equity can be another part of equity and is the amount of money that was invested in a business during the covered period by a business owner. Generally, this only applies to smaller businesses who are getting funding from an owner. Larger firms generally do not get funding from an owner, but rather use other forms of financing. To determine the best way for your company to handle owner's equity on your books, it's best to talk with your financial advisor or accountant.

Analyzing a balance sheet

Asset vs. liability What you owe or are owed, and what you have in total, are the core elements of a business's financial success: you want to have more than you owe. By looking at each line item under assets and liabilities you can see where you might need to make adjustments.

Balance sheet financial ratio Ratio analysis is a method of analyzing multiple parts of a company's financial statements, and the balance sheet is used most often to do this. Different types of ratio analyses are used to understand multiple aspects of a business, such as overall profitability, liquidity, and solvency. Two of the most popular ratios used to analyze a small business balance sheet are:

• Liquidity ratio : Liquidity is one type of ratio analysis and refers to the cash you have on hand to pay expenses or repay debts. You can determine your liquidity ratio by dividing current assets by current liabilities. A ratio over 1.0 means you have more assets than liabilities and have a better chance to pay your expenses.
• Profitability ratio : Are you retaining earnings, or do you have negative retained earnings? This is a simple way to gauge profitability.

Because some of this is complicated and can involves a lot of mathematical formulas, it's always a good idea to review your balance sheet with an accountant or your banking relationship manager.

More great information for small business owners

Starting up or growing your business—there's always more to discover.

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12 Key Elements of a Business Plan (Top Components Explained)

Starting and running a successful business requires proper planning and execution of effective business tactics and strategies .

You need to prepare many essential business documents when starting a business for maximum success; the business plan is one such document.

When creating a business, you want to achieve business objectives and financial goals like productivity, profitability, and business growth. You need an effective business plan to help you get to your desired business destination.

Even if you are already running a business, the proper understanding and review of the key elements of a business plan help you navigate potential crises and obstacles.

This article will teach you why the business document is at the core of any successful business and its key elements you can not avoid.

Let’s get started.

Why Are Business Plans Important?

Business plans are practical steps or guidelines that usually outline what companies need to do to reach their goals. They are essential documents for any business wanting to grow and thrive in a highly-competitive business environment .

1. Proves Your Business Viability

A business plan gives companies an idea of how viable they are and what actions they need to take to grow and reach their financial targets. With a well-written and clearly defined business plan, your business is better positioned to meet its goals.

2. Guides You Throughout the Business Cycle

A business plan is not just important at the start of a business. As a business owner, you must draw up a business plan to remain relevant throughout the business cycle .

During the starting phase of your business, a business plan helps bring your ideas into reality. A solid business plan can secure funding from lenders and investors.

After successfully setting up your business, the next phase is management. Your business plan still has a role to play in this phase, as it assists in communicating your business vision to employees and external partners.

Essentially, your business plan needs to be flexible enough to adapt to changes in the needs of your business.

3. Helps You Make Better Business Decisions

As a business owner, you are involved in an endless decision-making cycle. Your business plan helps you find answers to your most crucial business decisions.

A robust business plan helps you settle your major business components before you launch your product, such as your marketing and sales strategy and competitive advantage.

4. Eliminates Big Mistakes

Many small businesses fail within their first five years for several reasons: lack of financing, stiff competition, low market need, inadequate teams, and inefficient pricing strategy.

Creating an effective plan helps you eliminate these big mistakes that lead to businesses' decline. Every business plan element is crucial for helping you avoid potential mistakes before they happen.

5. Secures Financing and Attracts Top Talents

Having an effective plan increases your chances of securing business loans. One of the essential requirements many lenders ask for to grant your loan request is your business plan.

A business plan helps investors feel confident that your business can attract a significant return on investments ( ROI ).

You can attract and retain top-quality talents with a clear business plan. It inspires your employees and keeps them aligned to achieve your strategic business goals.

Key Elements of Business Plan

Starting and running a successful business requires well-laid actions and supporting documents that better position a company to achieve its business goals and maximize success.

A business plan is a written document with relevant information detailing business objectives and how it intends to achieve its goals.

With an effective business plan, investors, lenders, and potential partners understand your organizational structure and goals, usually around profitability, productivity, and growth.

Every successful business plan is made up of key components that help solidify the efficacy of the business plan in delivering on what it was created to do.

Here are some of the components of an effective business plan.

1. Executive Summary

One of the key elements of a business plan is the executive summary. Write the executive summary as part of the concluding topics in the business plan. Creating an executive summary with all the facts and information available is easier.

In the overall business plan document, the executive summary should be at the forefront of the business plan. It helps set the tone for readers on what to expect from the business plan.

A well-written executive summary includes all vital information about the organization's operations, making it easy for a reader to understand.

The key points that need to be acted upon are highlighted in the executive summary. They should be well spelled out to make decisions easy for the management team.

A good and compelling executive summary points out a company's mission statement and a brief description of its products and services.

An executive summary summarizes a business's expected value proposition to distinct customer segments. It highlights the other key elements to be discussed during the rest of the business plan.

Including your prior experiences as an entrepreneur is a good idea in drawing up an executive summary for your business. A brief but detailed explanation of why you decided to start the business in the first place is essential.

Adding your company's mission statement in your executive summary cannot be overemphasized. It creates a culture that defines how employees and all individuals associated with your company abide when carrying out its related processes and operations.

Your executive summary should be brief and detailed to catch readers' attention and encourage them to learn more about your company.

Components of an Executive Summary

Here are some of the information that makes up an executive summary:

• The name and location of your company
• Products and services offered by your company
• Mission and vision statements
• Success factors of your business plan

2. Business Description

Your business description needs to be exciting and captivating as it is the formal introduction a reader gets about your company.

What your company aims to provide, its products and services, goals and objectives, target audience , and potential customers it plans to serve need to be highlighted in your business description.

A company description helps point out notable qualities that make your company stand out from other businesses in the industry. It details its unique strengths and the competitive advantages that give it an edge to succeed over its direct and indirect competitors.

Spell out how your business aims to deliver on the particular needs and wants of identified customers in your company description, as well as the particular industry and target market of the particular focus of the company.

Include trends and significant competitors within your particular industry in your company description. Your business description should contain what sets your company apart from other businesses and provides it with the needed competitive advantage.

In essence, if there is any area in your business plan where you need to brag about your business, your company description provides that unique opportunity as readers look to get a high-level overview.

Components of a Business Description

Your business description needs to contain these categories of information.

• Business location
• The legal structure of your business
• Summary of your business’s short and long-term goals

3. Market Analysis

The market analysis section should be solely based on analytical research as it details trends particular to the market you want to penetrate.

Graphs, spreadsheets, and histograms are handy data and statistical tools you need to utilize in your market analysis. They make it easy to understand the relationship between your current ideas and the future goals you have for the business.

All details about the target customers you plan to sell products or services should be in the market analysis section. It helps readers with a helpful overview of the market.

In your market analysis, you provide the needed data and statistics about industry and market share, the identified strengths in your company description, and compare them against other businesses in the same industry.

The market analysis section aims to define your target audience and estimate how your product or service would fare with these identified audiences.

Market analysis helps visualize a target market by researching and identifying the primary target audience of your company and detailing steps and plans based on your audience location.

Obtaining this information through market research is essential as it helps shape how your business achieves its short-term and long-term goals.

Market Analysis Factors

Here are some of the factors to be included in your market analysis.

• The geographical location of your target market
• Needs of your target market and how your products and services can meet those needs
• Demographics of your target audience

Components of the Market Analysis Section

Here is some of the information to be included in your market analysis.

• Industry description and statistics
• Demographics and profile of target customers
• Marketing data for your products and services
• Detailed evaluation of your competitors

4. Marketing Plan

A marketing plan defines how your business aims to reach its target customers, generate sales leads, and, ultimately, make sales.

Promotion is at the center of any successful marketing plan. It is a series of steps to pitch a product or service to a larger audience to generate engagement. Note that the marketing strategy for a business should not be stagnant and must evolve depending on its outcome.

Include the budgetary requirement for successfully implementing your marketing plan in this section to make it easy for readers to measure your marketing plan's impact in terms of numbers.

The information to include in your marketing plan includes marketing and promotion strategies, pricing plans and strategies , and sales proposals. You need to include how you intend to get customers to return and make repeat purchases in your business plan.

5. Sales Strategy

Sales strategy defines how you intend to get your product or service to your target customers and works hand in hand with your business marketing strategy.

Your sales strategy approach should not be complex. Break it down into simple and understandable steps to promote your product or service to target customers.

Apart from the steps to promote your product or service, define the budget you need to implement your sales strategies and the number of sales reps needed to help the business assist in direct sales.

Your sales strategy should be specific on what you need and how you intend to deliver on your sales targets, where numbers are reflected to make it easier for readers to understand and relate better.

6. Competitive Analysis

Providing transparent and honest information, even with direct and indirect competitors, defines a good business plan. Provide the reader with a clear picture of your rank against major competitors.

Identifying your competitors' weaknesses and strengths is useful in drawing up a market analysis. It is one information investors look out for when assessing business plans.

The competitive analysis section clearly defines the notable differences between your company and your competitors as measured against their strengths and weaknesses.

This section should define the following:

• Your competitors' identified advantages in the market
• How do you plan to set up your company to challenge your competitors’ advantage and gain grounds from them?
• The standout qualities that distinguish you from other companies
• Potential bottlenecks you have identified that have plagued competitors in the same industry and how you intend to overcome these bottlenecks

In your business plan, you need to prove your industry knowledge to anyone who reads your business plan. The competitive analysis section is designed for that purpose.

7. Management and Organization

Management and organization are key components of a business plan. They define its structure and how it is positioned to run.

Whether you intend to run a sole proprietorship, general or limited partnership, or corporation, the legal structure of your business needs to be clearly defined in your business plan.

Use an organizational chart that illustrates the hierarchy of operations of your company and spells out separate departments and their roles and functions in this business plan section.

The management and organization section includes profiles of advisors, board of directors, and executive team members and their roles and responsibilities in guaranteeing the company's success.

Apparent factors that influence your company's corporate culture, such as human resources requirements and legal structure, should be well defined in the management and organization section.

Defining the business's chain of command if you are not a sole proprietor is necessary. It leaves room for little or no confusion about who is in charge or responsible during business operations.

This section provides relevant information on how the management team intends to help employees maximize their strengths and address their identified weaknesses to help all quarters improve for the business's success.

8. Products and Services

This business plan section describes what a company has to offer regarding products and services to the maximum benefit and satisfaction of its target market.

Boldly spell out pending patents or copyright products and intellectual property in this section alongside costs, expected sales revenue, research and development, and competitors' advantage as an overview.

At this stage of your business plan, the reader needs to know what your business plans to produce and sell and the benefits these products offer in meeting customers' needs.

The supply network of your business product, production costs, and how you intend to sell the products are crucial components of the products and services section.

Investors are always keen on this information to help them reach a balanced assessment of if investing in your business is risky or offer benefits to them.

You need to create a link in this section on how your products or services are designed to meet the market's needs and how you intend to keep those customers and carve out a market share for your company.

Repeat purchases are the backing that a successful business relies on and measure how much customers are into what your company is offering.

This section is more like an expansion of the executive summary section. You need to analyze each product or service under the business.

9. Operating Plan

An operations plan describes how you plan to carry out your business operations and processes.

The operating plan for your business should include:

• Information about how your company plans to carry out its operations.
• The base location from which your company intends to operate.
• The number of employees to be utilized and other information about your company's operations.
• Key business processes.

This section should highlight how your organization is set up to run. You can also introduce your company's management team in this section, alongside their skills, roles, and responsibilities in the company.

The best way to introduce the company team is by drawing up an organizational chart that effectively maps out an organization's rank and chain of command.

What should be spelled out to readers when they come across this business plan section is how the business plans to operate day-in and day-out successfully.

10. Financial Projections and Assumptions

Bringing your great business ideas into reality is why business plans are important. They help create a sustainable and viable business.

The financial section of your business plan offers significant value. A business uses a financial plan to solve all its financial concerns, which usually involves startup costs, labor expenses, financial projections, and funding and investor pitches.

All key assumptions about the business finances need to be listed alongside the business financial projection, and changes to be made on the assumptions side until it balances with the projection for the business.

The financial plan should also include how the business plans to generate income and the capital expenditure budgets that tend to eat into the budget to arrive at an accurate cash flow projection for the business.

Base your financial goals and expectations on extensive market research backed with relevant financial statements for the relevant period.

Examples of financial statements you can include in the financial projections and assumptions section of your business plan include:

• Projected income statements
• Cash flow statements
• Balance sheets
• Income statements

Revealing the financial goals and potentials of the business is what the financial projection and assumption section of your business plan is all about. It needs to be purely based on facts that can be measurable and attainable.

11. Request For Funding

The request for funding section focuses on the amount of money needed to set up your business and underlying plans for raising the money required. This section includes plans for utilizing the funds for your business's operational and manufacturing processes.

When seeking funding, a reasonable timeline is required alongside it. If the need arises for additional funding to complete other business-related projects, you are not left scampering and desperate for funds.

If you do not have the funds to start up your business, then you should devote a whole section of your business plan to explaining the amount of money you need and how you plan to utilize every penny of the funds. You need to explain it in detail for a future funding request.

When an investor picks up your business plan to analyze it, with all your plans for the funds well spelled out, they are motivated to invest as they have gotten a backing guarantee from your funding request section.

Include timelines and plans for how you intend to repay the loans received in your funding request section. This addition keeps investors assured that they could recoup their investment in the business.

12. Exhibits and Appendices

Exhibits and appendices comprise the final section of your business plan and contain all supporting documents for other sections of the business plan.

Some of the documents that comprise the exhibits and appendices section includes:

• Legal documents
• Licenses and permits
• Credit histories
• Customer lists

The choice of what additional document to include in your business plan to support your statements depends mainly on the intended audience of your business plan. Hence, it is better to play it safe and not leave anything out when drawing up the appendix and exhibit section.

Supporting documentation is particularly helpful when you need funding or support for your business. This section provides investors with a clearer understanding of the research that backs the claims made in your business plan.

There are key points to include in the appendix and exhibits section of your business plan.

• The management team and other stakeholders resume
• Marketing research
• Permits and relevant legal documents
• Financial documents

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Martin luenendonk.

Martin loves entrepreneurship and has helped dozens of entrepreneurs by validating the business idea, finding scalable customer acquisition channels, and building a data-driven organization. During his time working in investment banking, tech startups, and industry-leading companies he gained extensive knowledge in using different software tools to optimize business processes.

This insights and his love for researching SaaS products enables him to provide in-depth, fact-based software reviews to enable software buyers make better decisions.