business plan balance sheet definition

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

Trevor Betenson

10 min. read

Updated October 27, 2023

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.

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 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.

• 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.

See why 1.2 million entrepreneurs have written their business plans with LivePlan

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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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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Tim berry on business planning, starting and growing your business, and having a life in the meantime., standard business plan financials: projected balance.

This is another in a series of posts on standard business plan financials, continuing from last week.

“Think of it as your business dashboard, providing a snapshot of the financial health of your company at a specific moment in time. The purpose is simple: balance sheets list assets, liabilities and owner equity, typically in order from shortest- to longest-term assets and liabilities divided on either side of the balance sheet.”

Financial Post

The Balance Sheet includes spending and income that isn’t in the Profit and Loss. For example, the money you spend to repay a loan or buy new assets doesn’t show up in the Profit and Loss. And the money you take in as a new loan or a new investment doesn’t show up in the Profit and Loss either. The money you are waiting to receive from customers’ outstanding invoices shows up in the Balance Sheet, not the Profit and Loss. The Balance Sheet shows many reasons why profits are not cash, and why cash flow isn’t intuitive. It’s all related to the essential principles of cash flow .

The Balance Sheet shows your financial picture – assets, liabilities, and capital – at some specific moment. It helps to understand that the Profit and Loss shows financial performance over a length of time, like a month, quarter, or year. The Balance, in contrast, is a moment. Usually it’s the end of the month, quarter, or year. Sometimes it’s the end of the business day.

Balancing is a common term associated with bookkeeping, accounting, and finance. We “balance the books.” It’s a lot like reconciling a checkbook: if it isn’t right down to the last penny, then it’s wrong. Assets have to equal liabilities plus capital. Always.

A traditional Balance Sheet statement shows assets on the left side and liabilities and capital on the right side or the bottom, as in this illustration:

The balance sheet involves the other three of the six key financial terms (the ones that aren’t on the Profit and Loss: Assets, Liabilities, and Capital).

• Assets. Cash, accounts receivable, inventory, land, buildings, vehicles, furniture, and other things the company owns. Assets can usually be sold to somebody else. One definition is “anything with monetary value that a business owns.”
• Liabilities. Debts, notes payable, accounts payable, amounts of money owed to be paid back.
• Capital (also called equity). Ownership, stock, investment, retained earnings. Actually there’s an iron-clad and never-broken rule of accounting: Assets = Liabilities + Capital. That means you can subtract liabilities from assets to calculate capital.

Although traditional printed balance sheet statements are usually arranged horizontally, as in the illustration above, balance sheets in financial projections are usually arranged vertically, showing the assets first, then the liabilities, and then the capital. Here, for example, is the balance sheet for the first few months of the bike store I mentioned earlier. It’s the balance sheet associated with the Profit and Loss for the same company, Garrett’s bicycle store:

This is planning, not accounting . It’s one of the primary principles of the lean business planning. To make a powerful and useful cash flow projection, you need to summarize and aggregate the rows of the balance sheet. Resist the temptation to break it down into detail the way you would with a tax report after the fact. This is a tool to help you forecast your cash.

The Link Between Balance and Profit

The balance sheet is so different from the Profit and Loss that there is only one direct link between the two, a vital one that connects them so that when the books are right, the balance balances: That is the direct line from profits (Net Profits) on the Profit and Loss to Earnings and Retained Earnings on the Balance Sheet. The illustration here shows the link with the bicycle store sample:

[…] Balance Sheet that shows your current assets and […]

How can I make a well representable business plan. Which I can be able to look for funding

Darren, that’s what bplans.com is all about. Start here: Business Plan Guide

When creating a business plan, is it important to show a 3 year balance sheet?

Craig, depends on context. Is it for investors? For your own use? For a lean plan, cash flow may be enough, but it’s hard to do cash flow without a summarized balance. If you want a full formal business plan, a summarized balance sheet is part of what we’d call full financials. But of course it depends on the specific context of the plan. Tim

how can i draw a balance sheet for my business plan..since the no activity has started

@Brenda. As soon as you have either capital, assets, or liabilities assigned to your business, you have a balance sheet. Correct double-entry bookkeeping will ensure that the sum of your capital and liabilities are equal to your total assets. For projections, looking ahead, you estimate ahead-of-time what you think will need to happen with your capital, liabilities, and assets. Obviously these are estimated guesses. Then as your business launches, you regularly compare actual results to what you had expected, which helps you manage.

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Balance Sheet

Written by True Tamplin, BSc, CEPF®

Reviewed by subject matter experts.

Updated on March 17, 2023

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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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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 February 01, 2023

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.

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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.

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How to Prepare a Balance Sheet: 5 Steps for Beginners

• 10 Sep 2019

A company’s balance sheet is one of the most important financial statements it produces—typically on a quarterly or even monthly basis (depending on the frequency of reporting).

Depicting your total assets, liabilities, and net worth, this document offers a quick look into your financial health and can help inform lenders, investors, or stakeholders about your business. Based on its results, it can also provide you key insights to make important financial decisions.

When paired with cash flow statements and income statements , balance sheets can help provide a complete picture of your organization’s finances for a specific period. By determining the financial status of your organization, essential partners have an informative blueprint of your company’s potential and profitability.

Have you found yourself in the position of needing to prepare a balance sheet? Here's what you need to know to understand how balance sheets work and what makes them a business fundamental , as well as steps you can take to create a basic balance sheet for your organization.

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What Is a Balance Sheet?

A balance sheet is a financial statement that communicates the so-called “book value” of an organization, as calculated by subtracting all of the company’s liabilities and shareholder equity from its total assets.

A balance sheet offers internal and external analysts a snapshot of how a company is performing in the current period, how it performed during the previous period, and how it expects to perform in the immediate future. This makes balance sheets an essential tool for individual and institutional investors, as well as key stakeholders within an organization and any outside regulators who need to see the status of an organization during specific periods of time.

Most balance sheets are arranged according to this equation : Assets = Liabilities + Shareholders’ Equity

The equation above includes three broad buckets, or categories, of value which must be accounted for:

An asset is anything a company owns which holds some amount of quantifiable value, meaning that it could be liquidated and turned to cash. They're the goods and resources owned by the company.

Assets can be further broken down into current assets and non-current assets .

• Current assets , or short-term assets, are typically what a company expects to convert into cash within a year’s time, such as cash and cash equivalents, prepaid expenses, inventory, marketable securities, and accounts receivable.
• Non-current assets —also called fixed or long-term assets—are investments that a company does not expect to convert into cash in the short term, such as land, equipment, patents, trademarks, and intellectual property.

Related: 6 Ways Understanding Finance Can Help You Excel Professionally

2. Liabilities

A liability is anything a company or organization owes to a debtor. This may refer to payroll expenses, rent and utility payments, debt payments, money owed to suppliers, taxes, or bonds payable.

As with assets, liabilities can be classified as either current liabilities or non-current liabilities.

• Current or short-term liabilities are typically those due within one year, which may include accounts payable and other accrued expenses.
• Non-current or long term liabilities are typically those that a company doesn’t expect to repay within one year. They are usually long-term obligations, such as leases, bonds payable, or loans.

3. Shareholders’ Equity

Shareholders’ equity refers generally to the net worth of a company, and reflects the amount of money that would be left over if all assets were sold and liabilities paid. Shareholders’ equity belongs to the shareholders, whether they be private or public owners.

Just as assets must equal liabilities plus shareholders’ equity, shareholders’ equity can be depicted by this equation: Shareholders’ Equity = Assets - Liabilities

Does a Balance Sheet Always Balance?

A balance sheet should always balance. The name itself comes from the fact that a company’s assets will equal its liabilities plus any shareholders’ equity that has been issued. If you find that your balance sheet is not truly balancing, it may be caused by one of these culprits:

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

How to Prepare a Basic Balance Sheet

Here are the steps you can follow to create a basic balance sheet for your organization. Even if some or all of the process is automated through the use of an accounting system or software, understanding how a balance sheet is prepared will enable you to spot potential errors so that they can be resolved before they cause lasting damage.

1. Determine the Reporting Date and Period

A balance sheet is meant to depict the total assets, liabilities, and shareholders’ equity of a company on a specific date, typically referred to as the reporting date. Often, the reporting date will be the final day of the accounting period .

How Often Is a Balance Sheet Prepared?

Companies, especially publicly traded ones, prepare their balance sheet reports on a quarterly basis. When this is the case, the reporting date usually falls on the final day of the quarter. For companies that operate on a calendar year, those dates are:

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

Companies that report on an annual basis will often use December 31st as their reporting date, though they can choose any date.

It's not uncommon for a balance sheet to take a few weeks to prepare after the reporting period has ended.

Related: 10 Important Business Skills Every Professional Needs

2. Identify Your Assets

After you’ve identified your reporting date and period, you’ll need to tally your assets as of that date.

Typically, a balance sheet will list assets in two ways: As individual line items and then as total assets. Splitting assets into different line items will make it easier for analysts to understand exactly what your assets are and where they came from; tallying them together will be required for final analysis.

Assets will often be split into the following line items:

• Current Assets:
• Cash and cash equivalents
• Short-term marketable securities
• Accounts receivable
• Other current assets
• Non-current Assets:
• Long-term marketable securities
• Intangible assets
• Other non-current assets

Current and non-current assets should both be subtotaled, and then totaled together.

3. Identify Your Liabilities

Similarly, you will need to identify your liabilities. Again, these should be organized into both line items and totals, as below:

• Current Liabilities:
• Accounts payable
• Accrued expenses
• Deferred revenue
• Current portion of long-term debt
• Other current liabilities
• Non-Current Liabilities:
• Deferred revenue (non-current)
• Long-term lease obligations
• Long-term debt
• Other non-current liabilities

As with assets, these should be both subtotaled and then totaled together.

4. Calculate Shareholders’ Equity

If a company or organization is privately held by a single owner, then shareholders’ equity will generally be pretty straightforward. If it’s publicly held, this calculation may become more complicated depending on the various types of stock issued.

Common line items found in this section of the balance sheet include:

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

5. Add Total Liabilities to Total Shareholders’ Equity and Compare to Assets

To ensure the balance sheet is balanced, it will be necessary to compare total assets against total liabilities plus equity. To do this, you’ll need to add liabilities and shareholders’ equity together.

Here's an example of a finished balance sheet:

It's important to note that this balance sheet example is formatted according to International Financial Reporting Standards (IFRS), which companies outside the United States follow. If this balance sheet were from a US company, it would adhere to Generally Accepted Accounting Principles (GAAP).

Related: GAAP vs. IFRS: What Are the Key Differences and Which Should You Use?

If you’ve found that your balance sheet doesn't balance, there's likely a problem with some of the accounting data you've relied on. Double check that all of your entries are, in fact, correct and accurate. You may have omitted or duplicated assets, liabilities, or equity, or miscalculated your totals.

The Purpose of a Balance Sheet

Balance sheets are one of the most critical financial statements , offering a quick snapshot of the financial health of a company. Learning how to generate them and troubleshoot issues when they don’t balance is an invaluable financial accounting skill that can help you become an indispensable member of your organization.

Do you want to learn more about what's behind the numbers on financial statements? Explore our finance and accounting courses to find out how you can develop an intuitive knowledge of financial principles and statements to unlock critical insights into performance and potential.

This post was updated on August 12, 2022. It was originally published on September 10, 2019.

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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.

Why trust CNBC Select?

At CNBC Select, our mission is to provide our readers with high-quality service journalism and comprehensive consumer advice so they can make informed decisions with their money. Every article is based on rigorous reporting by our team of expert writers and editors with extensive knowledge of financial products . While CNBC Select earns a commission from affiliate partners on many offers and links, we create all our content without input from our commercial team or any outside third parties, and we pride ourselves on our journalistic standards and ethics.

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What Is a Business Plan?

Understanding business plans, how to write a business plan, common elements of a business plan, how often should a business plan be updated, 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.

A business plan is a document that details a company's goals and how it intends to achieve them. Business plans can be of benefit to both startups and well-established companies. For startups, a business plan can be essential for winning over potential lenders and investors. Established businesses can find one useful for staying on track and not losing sight of their goals. This article explains what an effective business plan needs to include and how to write one.

Key Takeaways

• A business plan is a document describing a company's business activities and how it plans to achieve its goals.
• Startup companies use business plans to get off the ground and attract outside investors.
• For established companies, a business plan can help keep the executive team focused on and working toward the company's short- and long-term objectives.
• There is no single format that a business plan must follow, but there are certain key elements that most companies will want to include.

Investopedia / Ryan Oakley

Any new business should have a business plan in place prior to beginning operations. In fact, banks and venture capital firms often want to see a business plan before they'll consider making a loan or providing capital to new businesses.

Even if a business isn't looking to raise additional money, a business plan can help it focus on its goals. A 2017 Harvard Business Review article reported that, "Entrepreneurs who write formal plans are 16% more likely to achieve viability than the otherwise identical nonplanning entrepreneurs."

Ideally, a business plan should be reviewed and updated periodically to reflect any goals that have been achieved or that may have changed. An established business that has decided to move in a new direction might create an entirely new business plan for itself.

There are numerous benefits to creating (and sticking to) a well-conceived business plan. These include being able to think through ideas before investing too much money in them and highlighting any potential obstacles to success. A company might also share its business plan with trusted outsiders to get their objective feedback. In addition, a business plan can help keep a company's executive team on the same page about strategic action items and priorities.

Business plans, even among competitors in the same industry, are rarely identical. However, they often have some of the same basic elements, as we describe below.

While it's a good idea to provide as much detail as necessary, it's also important that a business plan be concise enough to hold a reader's attention to the end.

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, it's best to fit the basic information into a 15- to 25-page document. Other crucial elements that take up a lot of space—such as applications for patents—can be referenced in the main document and attached as appendices.

These are some of the most common elements in many business plans:

• 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: Here, the company should describe the products and services it offers or plans to introduce. That might include details on pricing, product lifespan, and unique benefits to the consumer. Other factors that could go into this section include production and manufacturing processes, any relevant patents the company may have, as well as proprietary technology . Information about research and development (R&D) can also be included here.
• Market analysis: A company needs to have a good handle on the current state of its industry and the existing competition. This section should explain where the company fits in, what types of customers it plans to target, and how easy or difficult it may be to take market share from incumbents.
• Marketing strategy: This section can describe how the company plans to attract and keep customers, including any anticipated advertising and marketing campaigns. It should also describe the distribution channel or channels it will use to get its products or services to consumers.
• Financial plans and projections: Established businesses can include financial statements, balance sheets, and other relevant financial information. New businesses can provide financial targets and estimates for the first few years. Your plan might also include any funding requests you're making.

The best business plans aren't generic ones created from easily accessed templates. A company should aim to entice readers with a plan that demonstrates its uniqueness and potential for success.

2 Types of Business Plans

Business plans can take many forms, but they are sometimes divided into two basic categories: traditional and lean startup. According to the U.S. Small Business Administration (SBA) , the traditional business plan is the more common of the two.

• Traditional business plans : These plans tend to be much longer than lean startup plans and contain considerably more detail. As a result they require more work on the part of the business, but they can also be more persuasive (and reassuring) to potential investors.
• Lean startup business plans : These use an abbreviated structure that highlights key elements. These business plans are short—as short as one page—and provide only the most basic detail. If a company wants to use this kind of plan, it should be prepared to provide more detail if an investor or a lender requests it.

Why Do Business Plans Fail?

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

How frequently a business plan needs to be revised will depend on the nature of the business. 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 an option when a company prefers to give a quick explanation of its business. For example, a brand-new company may feel that it doesn't have a lot of information to provide yet.

Sections can include: a value proposition ; the company's major activities and advantages; resources such as staff, intellectual property, and capital; a list of partnerships; customer segments; and revenue sources.

A business plan can be useful to companies of all kinds. But as a company grows and the world around it changes, so too should its business plan. So don't think of your business plan as carved in granite but as a living document designed to evolve with your business.

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

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

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Understanding The Basics Of A Business Balance Sheet: Definition, Components, And Balance Sheet Template

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Business Balance Sheet Guide: Understand Financial Statements and Learn How To Read A Balance Sheet

Antonio Del Cueto, CPA

March 20, 2024

Think of a balance sheet as a financial mirror reflecting your business' current condition. On one side of the mirror, you see all the things you own or your belongings (assets), while on the other side, you see your debts and obligations, like bills and loans (liabilities).

Just as you gauge your well-being by checking your reflection, a balance sheet helps businesses assess their financial health. If your reflection shows imbalance or signs of strain, it prompts you to adjust your habits or seek help.

Similarly, an imbalanced balance sheet signals that a business might need to reevaluate its finances or seek assistance to ensure long-term prosperity.

Want To Organize Your Business's Finances? Download A Free Balance Sheet Excel Template Here

What Is A Balance Sheet and Why Is It Important?

Definition of a balance sheet.

A company's balance sheet is a financial statement that reports a company's assets, liabilities, and shareholders' equity at a specific point in time. The balance sheet provides a snapshot of a company's financial position, showing the sum of its liabilities and equity.

The balance sheet is divided into two main sections: assets and liabilities & shareholders' equity. This division helps to categorize and organize the various components of a company's financial structure.

Role of a Balance Sheet in Business

• Financial Position Assessment : The balance sheet helps stakeholders, including investors, creditors, and management, assess the financial health and stability of a business by providing a clear picture of its assets and liabilities.
• Liquidity Analysis : It enables analysis of a company's liquidity by comparing its current assets (cash, accounts receivable, etc.) to its current liabilities (short-term debts, accounts payable, etc.).
• Debt Management : Businesses can use the balance sheet to manage their debt levels and assess their ability to meet long-term obligations by analyzing the proportion of debt to equity.
• Investor Confidence : Investors rely on the balance sheet to evaluate the financial soundness of a company before making investment decisions. A healthy balance sheet often instills confidence in investors.
• Basis for Financial Reporting : The balance sheet is a fundamental component of a company's financial statements , alongside the income statement and cash flow statement. It provides essential information for preparing comprehensive financial reports.

Importance of a Balance Sheet for Stakeholders

The balance sheet is an essential part of a company's financial reporting. It is also known as the statement of financial position and shows the financial health of a business at a specific point in time.

Stakeholders can refer back to the balance sheet to see the company's financial standing, which includes cash and cash equivalents listed on the balance sheet. Balance sheets work in conjunction with the statement of cash flows to provide a complete picture of a company's financial situation.

The balance sheet formula always balances, with total assets equaling total liabilities and equity. Stakeholders can use a free balance sheet template or sample balance sheet example to analyze a company's financial stability.

What Are The Key Components Of A Balance Sheet?

Understanding assets and liabilities.

Understanding assets and liabilities is essential for the owners of a business to determine whether it has enough cash on hand. The balance sheet is one financial statement that shows the assets and liabilities of a business at a given date. The left side of the balance sheet accounts for the assets, including cash, inventory, and accounts receivable.

On the right side of the balance sheet are the liabilities, such as accounts payable, loans, and accrued expenses. The balance sheet also includes the owner's equity, which represents the amount of money that the owners have invested in the business.

The balance sheet can help determine the financial health of a business and whether it has enough cash to cover its liabilities, both current and long-term. The balance sheet gives a snapshot of the financial position of a business along with the income statement , and is often referred to as a statement of financial position.

The balance sheet also shows the cash balance of a business, both current and projected for the next year. Understanding the components of a balance sheet is crucial for managing the financial stability of a business, and resources like the Small Business Administration offer guidance on interpreting financial statements.

Exploring Equity and Shareholder Information

When exploring equity and shareholder information, it's important to look at the balance sheet . This financial statement shows the company's financial position at a specific date of the balance sheet. Shareholders can see how much cash the company has on hand, and how much is expected to be generated from operations in the next cash in one year.

Analyzing Income Statement in Relation to The Balance Sheet

Income statement provides a snapshot of a company's financial performance over a specific period. It details revenue, expenses, and net income. When analyzing the Income Statement in relation to the Balance Sheet, it is important to consider how the figures from both documents complement each other.

Balance sheet is also a crucial financial statement that shows a company's assets, liabilities, and equity at a specific point in time. By comparing the figures on the Income Statement to those on the Balance Sheet, analysts can gain insights into a company's financial health and performance.

Balance sheet shows how effectively a company is managing its resources and generating profits. By analyzing the Income Statement in relation to the Balance Sheet, stakeholders can evaluate the company's ability to generate profits, manage its debts, and invest in future growth.

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How To Read A Balance Sheet Effectively?

Interpreting current assets and current liabilities.

Current assets refer to assets that are expected to be converted into cash or used up within one year. Examples include cash, accounts receivable, and inventory. On the other hand, current liabilities are obligations due within one year, such as accounts payable and short-term debt.

Analysts use the current ratio (current assets divided by current liabilities) to assess a company's liquidity and ability to meet short-term obligations. A ratio above 1 indicates that a company has enough current assets to cover its current liabilities, while a ratio below 1 may indicate potential financial trouble.

It is important for investors and stakeholders to carefully analyze a company's current assets and current liabilities to assess its financial health and stability. By understanding the composition of these balances, one can gain insights into a company's short-term financial situation and make informed decisions about its investment potential.

Decoding Total Assets and Total Liabilities

Total Assets refer to the sum of all the resources, tangible or intangible, owned by a company. This includes cash, inventory, property, equipment, and investments. Understanding a company's total assets can give insight into its financial health and stability.

Total Liabilities represent the amount of debt and obligations that a company owes to creditors and other entities. This includes loans, accounts payable, and accrued expenses. Analyzing a company's total liabilities can help in determining its level of financial risk and leverage.

Understanding The Balance Sheet Equation for Financial Assessment

Understanding the balance sheet equation is crucial for financial assessment. It helps to analyze a company's assets, liabilities, and equity. By following the equation Assets = Liabilities + Equity , one can assess the financial health of a business and make informed decisions about investments and operations.

Why Use A Balance Sheet Template and How Does It Work?

Benefits of using a balance sheet template.

1. Time-saving: Using a template eliminates the need to create a balance sheet from scratch, saving valuable time and effort for businesses.

2. Accuracy: Templates are designed to ensure that all financial information is entered correctly and formatted properly, reducing the risk of errors.

3. Consistency: By using a template, businesses can maintain consistency in their balance sheet presentation, making it easier for stakeholders to understand and analyze the financial data.

4. Customization: Templates can be easily customized to suit the specific needs and preferences of a business, allowing for flexibility in reporting and analysis.

How a Balance Sheet Template Can Streamline Financial Reporting

A balance sheet template can streamline financial reporting by providing a standardized format for organizing and presenting a company's financial information. This template typically includes sections for assets, liabilities, and equity, making it easy for stakeholders to quickly assess the financial health of the business. By using a template, companies can ensure consistency in reporting and easily compare financial data over time.

Step-by-Step Guide To Complete Your Balance Sheet Using A Template

• Understand the Purpose : Recognize that a balance sheet is a financial statement that provides a snapshot of your company's financial position at a specific point in time.
• Gather Necessary Information : Collect all relevant financial data, including information about your company's assets, liabilities, and shareholders' equity.
• Select a Template : Choose a suitable balance sheet template that aligns with your company's needs and preferences. You can find various templates online or use accounting software to generate one.
• List Assets : Start by listing all of your company's assets on the balance sheet template. Include categories such as cash equivalents, net income, retained earnings, fixed assets, long-term assets, and intangible assets.
• List Liabilities : Next, list all of your company's liabilities. Include accounts payable, long-term liabilities, and any other obligations your company owes.
• Calculate Net Worth : Calculate your company's net worth by subtracting the total liabilities from the total assets. This will give you an indication of your company's financial health and how much value it holds.
• Include Depreciation : Make sure to account for depreciation for fixed assets and any long-term assets that can be converted into cash within one year. This ensures an accurate representation of your company's financial status.
• Calculate Shareholders' Equity : Use the balance sheet to calculate shareholders' equity, which represents the portion of the company owned by shareholders. This is calculated by subtracting total liabilities from total assets.
• Review and Analyze : Once you have completed the balance sheet, review it carefully to ensure accuracy. Analyze the figures to gain insights into your company's financial position and make informed decisions.
• Update Regularly : Keep your balance sheet up to date by regularly updating it with new financial information. This will ensure that you always have an accurate representation of your company's financial status.

Further Reading: Learn The Difference Between A Trial Balance And Balance Sheet

How Does A Balance Sheet Reflect The Financial Health Of A Business?

Assessing the financial position through a balance sheet.

Assessing the financial position through a balance sheet is crucial for understanding a company's assets, liabilities, and equity at a specific point in time. By analyzing the balance sheet, investors and stakeholders can evaluate the company's solvency, liquidity, and overall financial health.

Assets are listed on the left side of the balance sheet, representing what the company owns. Liabilities and equity are on the right side, representing what the company owes and owns, respectively. The balance sheet follows the accounting equation: Assets = Liabilities + Equity.

Analyzing the balance sheet can help identify trends in a company's financial performance and potential risks. It also provides insight into how efficiently a company is utilizing its resources and managing its debts. By comparing balance sheets over time, stakeholders can track changes and make informed decisions about the company's financial stability.

Impact Of Income Statement And Cash Flow Statement On The Balance Sheet

Income statement and cash flow statement are crucial components that directly impact the balance sheet. The income statement provides information on a company's profitability, which ultimately affects its overall financial health reflected in the balance sheet. The cash flow statement, on the other hand, shows how cash is generated and used, influencing the liquidity position of the company, which is a key element of the balance sheet.

How Enough Cash Reserves Are Reflected In The Balance Sheet

Cash reserves are typically listed as a current asset on a company's balance sheet. Having enough cash reserves reflects a company's ability to cover its short-term liabilities and unexpected expenses. This indicates financial stability and ability to weather economic downturns or unexpected events. Investors and creditors often look for healthy cash reserves when evaluating a company's financial health.

A balance sheet is a fundamental financial statement that provides a snapshot of a company's financial position at a specific point in time. It presents the company's assets, liabilities, and shareholders' equity, categorizing them into two main sections.

Assets, such as cash, inventory, and accounts receivable, are listed on the left side, while liabilities, including accounts payable and loans, are shown on the right. Shareholders' equity represents the owners' investments in the business.

The balance sheet can be used to assess a company's financial health, analyze its liquidity, and determine its ability to meet short-term and long-term obligations. It is a vital tool for investors, creditors, and management in making informed decisions about the company's operations and financial strategy.

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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

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• How to Use Your Business Plan Most Effectively
• The Basics of Writing a Business Plan
• 12 Reasons You Need a Business Plan
• The Main Objectives of a Business Plan
• What to Include and Not Include in a Successful Business Plan
• The Top 4 Types of Business Plans
• A Step-by-Step Guide to Presenting Your Business Plan in 10 Slides
• 6 Tips for Making a Winning Business Presentation
• 12 Ways to Set Realistic Business Goals and Objectives
• 3 Key Things You Need to Know About Financing Your Business
• How to Perfectly Pitch Your Business Plan in 10 Minutes
• How to Fund Your Business Through Friends and Family Loans and Crowdsourcing
• How to Fund Your Business Using Banks and Credit Unions
• How to Fund Your Business With an SBA Loan
• How to Fund Your Business With Bonds and Indirect Funding Sources
• How to Fund Your Business With Venture Capital
• How to Fund Your Business With Angel Investors
• How to Use Your Business Plan to Track Performance
• How to Make Your Business Plan Attractive to Prospective Partners
• Is This Idea Going to Work? How to Assess the Potential of Your Business.
• When to Update Your Business Plan
• How to Write the Management Team Section to Your Business Plan
• How to Create a Strategic Hiring Plan
• How to Write a Business Plan Executive Summary That Sells Your Idea
• How to Build a Team of Outside Experts for Your Business
• Use This Worksheet to Write a Product Description That Sells
• What Is Your Unique Selling Proposition? Use This Worksheet to Find Your Greatest Strength.
• How to Raise Money With Your Business Plan
• Customers and Investors Don't Want Products. They Want Solutions.
• 5 Essential Elements of Your Industry Trends Plan
• How to Identify and Research Your Competition
• Who Is Your Ideal Customer? 4 Questions to Ask Yourself.
• How to Identify Market Trends in Your Business Plan
• How to Define Your Product and Set Your Prices
• How to Determine the Barriers to Entry for Your Business
• How to Get Customers in Your Store and Drive Traffic to Your Website
• How to Effectively Promote Your Business to Customers and Investors
• What Equipment and Facilities to Include in Your Business Plan
• How to Write an Income Statement for Your Business Plan
• How to Make a Balance Sheet
• How to Make a Cash Flow Statement
• How to Use Financial Ratios to Understand the Health of Your Business
• How to Write an Operations Plan for Retail and Sales Businesses
• How to Make Realistic Financial Forecasts
• How to Write an Operations Plan for Manufacturers
• What Technology Needs to Include In Your Business Plan
• How to List Personnel and Materials in Your Business Plan
• The Role of Franchising
• The Best Ways to Follow Up on a Buisiness Plan
• The Best Books, Sites, Trade Associations and Resources to Get Your Business Funded and Running
• How to Hire the Right Business Plan Consultant
• Business Plan Lingo and Resources All Entrepreneurs Should Know
• How to Write a Letter of Introduction
• What To Put on the Cover Page of a Business Plan
• How to Format Your Business Plan
• 6 Steps to Getting Your Business Plan In Front of Investors

How to Make a Balance Sheet Create this important document to show investors the true net worth of your business, and to keep track of your financial trajectory.

By Eric Butow • Oct 27, 2023

Key Takeaways

• What a balance sheet should include
• Why you should compare balance sheets year after year

Opinions expressed by Entrepreneur contributors are their own.

This is part 3 / 11 of Write Your Business Plan: Section 5: Organizing Operations and Finances series.

If the income sheet shows what you're earning, the balance sheet shows what you're worth. A balance sheet can help an investor see that a company owns valuable assets that don't show up on the income statement or that it may be profitable but is heavily in debt. It adds up everything your business owns, subtracts everything the business owes, and shows the difference as the net worth of the business.

Actually, accountants put it differently and, of course, use different names. The things you own are called assets. The things you owe money on are called liabilities. And net worth is referred to as equity.

Related: How to Calculate Your Net Worth and Grow Your Wealth

A balance sheet shows your condition on a given date, usually the end of your fiscal year. Sometimes balance sheets are compared. That is, next to the figures for the end of the most recent year, you place the entries for the end of the prior period. This gives you a snapshot of how and where your financial position has changed.

A balance sheet also places a value on the owner's equity in the business. When you subtract liabilities from assets, what's left is the value of the equity in the business owned by you and any partners. Tracking changes in this number will tell you whether you're getting richer or poorer.

An asset is basically anything you own of value. It gets a little more complicated in practice, but that's the working definition.

Assets come in two main varieties: current assets and fixed assets. Current assets are anything that is easily liquidated or turned into cash. They include cash, accounts receivables, inventory, marketable securities, and the like.

Related: How to Write an Income Statement for Your Business Plan

Fixed assets include stuff that is harder to turn into cash. Examples are land, buildings, improvements, equipment, furniture, and vehicles.

The fixed asset part of the balance sheet sometimes includes a negative value—that is, a number you subtract from the other fixed asset values. This number is depreciation, and it's an accountant's way of slowly deducting the cost of a long-lived asset such as a building or a piece of machinery from your fixed asset value.

Intellectual properties, such as patents and copyrights, also fall into the asset category. For some companies, a recipe, a formula, or a new invention may actually be their most valuable asset. Of course, the actual value is often very hard to determine. Patents, trademarks, copyrights, exclusive distributorships, protected franchise agreements, and the like do have somewhat more accessible value.

Related: Net Worth Calculator for Franchises

You'll also have intangibles such as your reputation, your standing in the community, and "goodwill," which are difficult to put a value on. Probably the best way to think of goodwill is like this: If you sell your company, the IRS says the part of the sales price that exceeds the value of the assets is goodwill. As a result of its slipperiness, some planners never include an entry for goodwill, although its value may in fact be substantial.

Liabilities

Liabilities are the debts your business owes. They come in two classes: short-term and long-term.

Short-term liabilities are also called current liabilities. Any debt that is going to be paid off within twelve months is considered current. That includes accounts payable you owe suppliers, short-term bank loans (shown as notes payable), and accrued liabilities you have built up for such things as wages, taxes, and interest.

Related: Tips and Strategies for Using the Balance Sheet as Your Franchise Scorecard

Any debt that you won't pay off in a year is long-term. Mortgages and bank loans with more than a one-year term are considered in this class.

A Note on Land

Almost anything can lose value, but for accounting purposes, land doesn't. As a rule, you never depreciate land, although you may depreciate buildings as well as other long-lived purchases.

Buzzword: Book Value

The book value of the business is the net worth (or owner's equity). Most valuation methods for small and midsized businesses use the net worth plus adjusted earnings or free cash flow multiple to create a rough and ready valuation. If you are just starting out, you will probably feel that you are undervalued because you have nothing on which to base your value. Don't fret: Value grows with time as you build your business. It's better that the value of your business honestly reflects your business. If you recall the dot-com crash of 2000, it was largely the result of many up-and-coming dot-coms being greatly overvalued.

Related: How to Make a Cash Flow Statement

Tax Considerations

You always want to maximize profits, right? Savvy entrepreneurs know that managing reported profits can save on taxes. Part of the trick is balancing salaries, dividends, and retained earnings.

Tax regulations treat each differently, and you can't exactly do whatever you want. Get good advice and be ready to sacrifice reported profits for real savings.

Personal Financial Statement

Investors and lenders like to see business plans with substantial investments by the entrepreneur or with an entrepreneur who is personally guaranteeing any loans and has the personal financial strength to back those guarantees. Your personal financial statement is where you show plan readers how you stack up financially as an individual.

Related: The Definition of Value Is Changing — Here's What Entrepreneurs Need to Know to Survive the Shifting Global Trends

The personal financial statement comes in two parts. One is similar to a company balance sheet and lists your liabilities and assets. A net worth figure at the bottom, like the net worth figure on a company balance sheet, equals total assets minus total liabilities.

A second statement covers your personal income. It is similar to a company profit and loss statement, listing all your personal expenses, such as rent or mortgage payments, utilities, food, clothing, and entertainment. It also shows your sources of income, including earnings from a job, income from another business you own, child support or alimony, interest and dividends, and the like.

The figure at the bottom is your net income; it equals total income minus total expenses. If you've ever had to fill out a personal financial statement to borrow money for a car loan or home mortgage, you've had experience with a personal financial statement. You should be able to simply update figures from a previous personal financial statement.\

Related: How to Make Realistic Financial Forecasts

Because this is important only to investors or lenders, you want to be careful to include this only when necessary. For a small business looking for a small amount of funding, you may be able to draft something with your accountant verifying your net worth and/or previous year's income.

More in Write Your Business Plan

Section 1: the foundation of a business plan, section 2: putting your business plan to work, section 3: selling your product and team, section 4: marketing your business plan, section 5: organizing operations and finances, section 6: getting your business plan to investors.

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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.

Related Posts

• Cash Flow Statement - Definition and Importance
• How to Read a Balance Sheet?
• Income statement - Definition, Importance and Example

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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.

blackred / Getty Images

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.

What is a balance sheet?

Definition of the balance sheet.

The balance sheet presents the assets and liabilities of the company at the end of a financial year. On the assets side, the assets listed belong to (or are owed to) the company, and on the liabilities side are listed the items owed to creditors (State, suppliers, employees) as well as capital contributors (shareholders, banks).

The balance sheet is part of the company's financial statements , together with the income statement, and the cash flow statement .

Example of balance sheet

Here is an example of a balance sheet from our business planning app .

Balance sheet analysis

The balance sheet provides a quick overview of the following elements:

• the company's cash position
• the amount of its debts
• the degree of capital intensity (weight of investments in fixed assets)
• the book value of the shareholders' equity, which is understood here as opposed to the real value (financial or market value), which depends on the company's potential for future profitability, which the balance sheet does not allow to be assessed

The analysis of the balance sheet is generally carried out in parallel with that of the other financial statements. Indeed, the balance sheet presents a static view of the company at the end of the financial year and is therefore of limited interest in itself.

Moreover, in order to be analysed in a relevant manner, the balance sheet must also be restated to show a so-called financial balance sheet (elimination of non-book values, adjustments to better reflect the financial situation of the company).

The analysis of the balance sheet focuses on the following elements:

• financial policy
• investment policy

Working capital and return on assets

Financial policy.

From a purely financial point of view, shareholders and lenders finance the investments and working capital of the company in order to generate a return.

The analysis of financial policy focuses on the distribution of risk between the different providers of capital (lenders and shareholders), the ability of the company to service its debts, and the distribution of cash flows between lenders, shareholders, and reinvestment.

Here are some examples of ratios to measure these elements:

• Financial leverage: net debt/equity
• Net debt/EBITDA: gives an indication of the number of years it would take to repay the company's debts if 100% of the EBITDA (used as a proxy for operating cash flow) was used to deleverage
• Quick ratio: (cash + marketable securities + trade receivables) / debts due in less than one year, measures the company's ability to meet its short term operational and financial commitments
• Coverage ratio: cash flow available for debt service / (repayment + interest), measures the company's room to manoeuvre to meet its annual financial obligations without defaulting
• EBITDA / Financial expenses: measures the company's ability to continue to pay interest in the event of default (debt restructuring)

Investment policy

The idea here is to assess the level of investment needed to maintain the productive assets of the company. Here are some examples of ratios to measure these elements:

• Depreciation / Gross Tangible Assets: gives an idea of the rate of wear and tear of the productive equipment
• Investments / Depreciation: a ratio of less than 1 indicates an ageing of the productive assets, a ratio of more than 1 indicates an expansion of the productive apparatus.

The idea here is to assess the efficiency with which the company uses its assets to generate sales and to measure the impact of working capital on the business. Here are some examples of ratios to measure these elements:

• Turnover / fixed assets: measures the return on productive assets (£x generated for £1 invested)
• Turnover / total assets: measures the return on assets (£x generated for £1 invested)
• Working capital ratios mentioned in this article

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Home > Financial Projections > Balance Sheet Forecast in a Business Plan

Balance Sheet Forecast in a Business Plan

The balance sheet forecast is one of the three main statements for business plan financials, and is sometimes referred to as the statement of financial position.

The balance sheet is in effect a representation of the two sides of the accounting equation . On one side of the balance sheet are the assets (property, plant, equipment, accounts receivables, cash etc.), and on the other side are the methods by which those assets are funded, which can either be liabilities (debt finance, accounts payable etc.) or equity (shareholder capital, and profits retained within the business).

There are many balance sheet formats, the layout below acts as a quick reference, and sets out the most commonly encountered accounting terms when dealing with a business plan balance sheet forecast.

As an example, the annual report for apple shows a typical balance sheet layout.

Use of the Projected Balance Sheet Forecast

The business plan financial section for most businesses tends to concentrate on the income statement and fails to get to grips with the accounting balance sheet. Our financial projections template  always includes the balance sheet template.

• Management should use the projected balance sheet forecast to help identify whether the need for working capital (inventory plus accounts receivable less accounts payable) is growing, and how that need is being funded (cash, overdraft, loans etc).
• They are used by trade suppliers to decide on whether credit is given as they identify the net assets and cash position of the business.
• Bank managers utilise the balance sheet forecast, as they base their lending ratios on certain aspects of it, for example the current ratio = current assets / current liabilities is used to determine liquidity and the risk of non repayment of a loan.
• Balance sheet forecasts are used by investors to decide whether to invest or not and at what price. For example they will look at the debt / equity ratio to determine the level of risk involved

Any number of people could be using your balance sheet forecast to make decisions about your business. It is important that you have an understanding of what information the balance sheet forecast is providing and what that information is telling you.

About the Author

Chartered accountant Michael Brown is the founder and CEO of Plan Projections. He has worked as an accountant and consultant for more than 25 years and has built financial models for all types of industries. He has been the CFO or controller of both small and medium sized companies and has run small businesses of his own. He has been a manager and an auditor with Deloitte, a big 4 accountancy firm, and holds a degree from Loughborough University.

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