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A balance sheet is a financial statement that shows the balance among your assets, liabilities, and equity. It can help you track the financial health of your small business and make informed decisions. You may also need a balance sheet to file taxes, secure a loan, bring in investors, or sell your business.
Read on to learn more about small business balance sheets, including what they are, what they look like, and how they can help you with your business.
Key Points
• A balance sheet is a financial statement that shows a company’s assets, liabilities, and owner’s equity at a specific point in time.
• Balance sheets help business owners evaluate financial health, manage obligations, and make informed financial decisions.
• Assets represent what a business owns, while liabilities represent what the business owes to outside parties.
• Lenders, investors, and the Internal Revenue Service (IRS) may require a balance sheet when reviewing loans, investments, or tax filings.
• Regularly reviewing a balance sheet can help small businesses monitor growth, plan future expenses, and maintain financial stability.
What Is a Balance Sheet?
A balance sheet is a financial statement that provides a snapshot of a company’s financial position at a specific point in time. It shows what the business owns (assets), what it owes (liabilities), and the difference between the two (owner’s equity). The balance sheet follows the fundamental accounting equation:
Assets = Liabilities + Owner’s Equity
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Assets
Assets are resources that the business owns and can use to generate revenue. They’re usually listed in order of liquidity, with the most liquid assets (e.g., cash) listed first. Examples of assets include:
• Cash
• Accounts receivable
• Inventory (the value of goods held by the business for resale)
• Property, plant, and equipment (the value of long-term assets, such as buildings, machinery, and vehicles)
• Investments (the value of investments held by the business, such as stocks or bonds)
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Liabilities
Liabilities are obligations that the company owes to external parties. These include:
• Long-term business loans
• Accrued expenses
• Deferred tax liability (accumulated taxes that haven’t yet been paid)
• Accounts payable
Equity
Owner’s equity represents the owner’s stake in the business. It’s calculated as the difference between the company’s assets and liabilities and represents the amount of the company’s assets that are owned by the owner or shareholders.
This part of the balance sheet also includes retained earnings. Retained earnings represent the cumulative net income of the company that has been retained in the business rather than distributed to shareholders as dividends.
Income Statement vs Balance Sheet
Both balance sheets and income statements offer valuable information on a company’s financial health, but they differ in a few key ways.
An income statement (also known as a profit and loss statement) is a financial statement that summarizes a company’s revenues, expenses, and profits or losses over a specific period, typically a quarter or a year.
An income statement provides insight into your company’s financial performance by showing how much money the company made (revenue), how much it spent (expenses), and the resulting profit or loss. This information is also important to investors and lenders since it indicates whether the company was profitable during the given time.
A balance sheet, by contrast, shows a company’s financial health at a specific point in time. Creditors and investors look at a company’s balance sheet to understand what the company owns (assets) and owes (liabilities). The balance between those two items communicates the company’s financial health.
Here’s a side-by-side comparison of income statements and balance sheets:
| Income Statement | Balance Sheet |
|---|---|
| Reports a company’s finances for a specific date | Reports a company’s revenue and expenses over a specific period |
| Reports assets, liabilities, and equity | Reports revenue and expenses |
| Used to see if a company has enough assets to satisfy its obligations | Used to see if a company is profitable |
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Do Small Businesses Need a Balance Sheet?
If your company brings in revenues of more than $250,000 or has assets of more than $250,000, the IRS may require you to complete a small business balance sheet when you file your taxes. If your company has both revenues and assets under that threshold, it’s generally not required.
However, if you want to take out a small business loan, lenders may ask to see your balance sheet when you apply. If you’re looking to bring in investors or plan to sell your company, you’ll also likely need a balance sheet.
If none of those apply, it can still be wise to have a balance sheet, as it lets you know at a glance where your business stands in terms of what it owns and what it owes.
A balance sheet also offers a scannable list of assets and liabilities for comparison, so you can make sure your business is able to cover its short-term obligations. If you see that liabilities outweigh assets, you’ll need to find ways to increase revenue or raise working capital, either from investors or through financing.
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Benefits of Having a Balance Sheet
The benefits of having a balance sheet for your small business include:
• Provides a clear snapshot of assets, liabilities, and equity
• Helps business owners make strategic financial decisions
• Provides essential support when applying for loans or credit from lenders
• Assists in accurate tax reporting and compliance
• Monitors business growth and financial health over time
• Helps plan and manage future expenses and investments
• Useful for determining the business’s worth in case of sale or investment
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Writing a Balance Sheet for a Small Business
Ready to create a simple balance sheet for your small business’s use? You have a few options.
Start With What You’ve Got
If you already use small business accounting software, you may have the ability to create a balance sheet statement directly from that software. These programs can typically build the balance sheet for you by automatically filling in all relevant assets and liabilities, often using real-time information from your bank accounts.
Ask Your Accountant
If you have an accountant who manages your books and files your taxes, they can help you generate a balance sheet and explain how it works.
DIY Your Balance Sheet
If the other two aren’t options, you can generate your own balance sheet. There are templates you can find online to use, or you can create one in a spreadsheet. Make sure to include your current and fixed assets, current and long-term liabilities, and any money you (or others) have invested in the company.
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Small Business Balance Sheet Example
Take a look at an example of a balance sheet for a fictional small business so you get a sense of what yours might look like.
| ASSETS | LIABILITIES | ||
|---|---|---|---|
| Current Assets | Current Liabilities | ||
| Cash | $11,000 | Wages Payable | $5,000 |
| Accounts Receivable | $21,000 | Accounts Payable | $5,500 |
| Inventory | $33,000 | Taxes Payable | $10,000 |
| Total Current Assets | $65,000 | Short-Term Loans Payable | $3,000 |
| Total Current Liabilities | $23,500 | ||
| Noncurrent Assets | Noncurrent Liabilities | ||
| Office Equipment | $3,500 | Long-Term Liabilities | $20,000 |
| Real Estate | $25,000 | Long-Term Debt | $30,000 |
| Total Noncurrent Assets | $28,500 | Total Noncurrent Liabilities | $50,000 |
| EQUITY | |||
| Owner’s Equity | $20,000 | ||
| Total Equity | $20,000 |
This sample balance sheet is in balance since total assets ($93,500) equals total liabilities ($73,500) plus total equity ($20,000).
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Pro Forma Balance Sheet
Pro forma financial statements are financial reports for your business based on hypothetical scenarios. As a result, they allow you to test out situations you think may happen in the future to help you make business decisions.
A pro forma balance sheet is a balance sheet with forecasted future values — namely, the assets, liabilities, and equity you wish to have in the future. These balance sheets can be useful for planning any significant changes to the business, whether you’re thinking about taking out a new loan, purchasing a large piece of equipment, or even buying another company.
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The Takeaway
The balance sheet is a critical financial statement that provides valuable information about a company’s financial position. No matter how big or small your business is, it’s a good idea to periodically generate and review the balance sheet to keep tabs on your company’s financial health and make informed decisions. By understanding the balance sheet, you can better manage your finances and position your business for long-term success.
If you’re seeking financing for your business, SoFi is here to support you. On SoFi’s marketplace, you can shop and compare financing options for your business in minutes.
FAQ
How do I create a balance sheet for a small business?
To create a small business balance sheet, list assets (cash, inventory, equipment) on one side and liabilities (loans, accounts payable) on the other. Subtract liabilities from assets to calculate equity, and ensure total assets equal the sum of liabilities and equity. You can use accounting software or online templates for accuracy.
Do all businesses need a balance sheet?
No, not all businesses are legally required to have a balance sheet. However, it’s highly recommended for all businesses, as it provides valuable insights into financial health, supports decision-making, and is essential for obtaining loans, attracting investors, and reporting taxes.
Does the IRS require a balance sheet for all businesses?
No, the Internal Revenue Service (IRS) doesn’t require a balance sheet for all businesses. Sole proprietors typically don’t need to provide one unless required for specific tax forms. Corporations and partnerships with gross receipts or total assets of $250,000 or more, however, may be required to include a balance sheet with their tax returns.
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