For that, your balance sheet is crucial. After all, scrambling through piles of receipts or scrolling for emails is stressful with a deadline looming or an auditor watching over you. You don’t want to miss an opportunity for an acquisition, investment, or loan because your financial records are unorganized or unbalanced.
If you’re in a time crunch to create a balance sheet, don’t worry. We’ll walk you through all the important steps, share balance sheet examples, and show you the balance sheet format to follow so you can get your financial records up to date—fast.
What is a balance sheet?
A balance sheet is a financial document that states a business’ assets, liabilities, and stockholder equity, and is shared either on a monthly or quarterly basis. The main benefit of a balance sheet is to know what a business is worth.
Several key stakeholders could request a balance sheet from you. For example, your local tax agency might randomly select your business for an audit. A balance sheet with a list of assets and liabilities can help an auditor get a clear picture of your business’ financial position.
Here’s what those assets and liabilities might look like for a new business:
What is an asset?
An asset is an item of economic value that a company owns. Most assets are tangible assets, but there are also intangible assets.
New businesses typically have assets such as inventory, cash, equipment, or machinery—all tangible—and, in some cases, intangible assets like patents or trademarks. Enterprise assets may also include things like investments, accounts receivable, land, transportation, logos, brand recognition, and marketing assets, such as an email list or social media account.
The balance sheet equation for assets is:
Liabilities + Stockholder Equity = Assets
What is a liability?
A liability is a debt that a business owes. It costs the business money over time and decreases the value of the business.
For example, if you’ve invested your own money in a business, that’s called a shareholder loan. A shareholder loan is a debt that the business owes you, the shareholder. Many new businesses typically have liabilities, such as credit card debt and shareholder loans.
Enterprise-level businesses may have liabilities like accounts payable, lease contracts, payroll, bank loans, and deferred taxes.
What is stockholder equity?
Stockholder (or shareholder) equity is the value of the business after all debts and liabilities have been settled. The balance sheet equation to calculate shareholder’s equity is:
Total assets - Total liabilities = Stockholder’s equity
The terms “stockholder equity,” "shareholder equity," and “owner’s equity” essentially mean the same thing. Stockholder or shareholder equity is typically the term assigned to corporations, whereas owner’s equity is reserved for sole proprietorships.
For example, if you have $20,000 in assets and $10,000 in liabilities, then you have $10,000 in stockholder equity. As your assets grow and liabilities shrink, you’ll have more stockholder equity.
In the early stages, it’s normal to have a negative balance in stockholder equity—liabilities (i.e., your startup costs) are higher than your assets. You may invest $50,000 in your business before you ever launch to the public. You could be in the early stages of buying product inventory, building an app, or designing a website. However, you have no assets and no cash.
What’s the purpose of a balance sheet?
A balance sheet can help you obtain a loan, establish a value for your business, and keep financial records organized for tax agencies.
1. Obtain credit/debt from a lender
When a lender or bank is deciding whether to provide credit to a business, a balance sheet helps them estimate risk. Lenders typically look at liabilities to ensure that a business isn’t overextending itself financially—lenders want to make their money back. If existing debts (i.e., liabilities) are much higher than assets, a lender may hesitate to extend further credit.
While lenders may look at your income statement to assess profitability (i.e., do you have more revenue than expenses), a balance sheet helps identify assets such as real estate, machinery, and inventory that could be used to recoup their money if you’re unable to pay back the loan.
Alternatively, Shopify store owners can obtain cash advances and loans through Shopify Capital. In lieu of a balance sheet, Shopify uses data from previous sales to see how much money the merchant is qualified to borrow. Shopify then takes a percentage of the merchant's future sales to pay back the loan.
2. To set a business valuation
If someone is looking to acquire your business, they’ll request a balance sheet to help understand your financial position.
Other aspects involved in setting a business valuation include the size of your customer base relative to the industry, competitive advantages, the employees and executives of your company (particularly during “acquihire” valuations), year-over-year growth, and revenue and profit.
3. Detail a business’ financial position over time
A balance sheet can help you understand whether your business has more assets or liabilities at a moment in time.
Over the years, your balance sheet will also include historical data, which can help you—or your lenders or your investors—evaluate your financial strengths and weaknesses, and how they’ve changed over time.
What do balance sheets include?
Small businesses may list only a handful of the items below. As with most financial documents, complexity scales with your business. Starting with a balance sheet template can make things easier.
- Accounts receivable
- Prepaid expenses
- Intangible assets
- Other assets
- Accounts payable
- Long-term debt
- Deferred revenue
- Notes payable
- Accrued income taxes
- Accrued compensation and benefits
3. Shareholders equity
- Equity capital
- Retained earnings
- Common stock
- Treasury stock
Does a balance sheet need to balance?
Yes, a balance sheet needs to be balanced. Your balance sheet is imbalanced if your assets don’t equal your total liabilities plus equity. If a balance sheet is imbalanced, it means a mistake was made in its calculation. A few common mistakes include:
- Missing transactions
- Forgetting to include inventory changes when pricing or stock levels change
- Placing an item in the wrong category
Mistakes can erode trust in leadership, cause financial losses, lead to poor decision-making, and more. Public companies are highly attentive to potential errors on balance sheets as they can impact their stock price. Artificially inflating or deflating a stock price can lead to fines, jail time, or other criminal prosecution.
To ensure that your balance sheet is accurate, consider updating it daily or weekly instead of quarterly. You may also want to create a money management account to streamline record-keeping and update your balance sheet faster.
How to create a balance sheet in a spreadsheet
1. Set a regular timeframe
Large enterprises are likely to update their balance sheets on a daily basis, whereas smaller businesses typically update their balance sheets every month.
2. Create a balance sheet format
You can find balance sheet formats and templates with a quick Google search. Here’s one from Microsoft and another in Google Docs. You can also use small business accounting software to auto-create a quick PDF balance sheet based on numbers you input, credit card information, and bank account information.
Typically, assets are listed first, then liabilities, and, finally, shareholder’s equity. In the early stages of your business, you might not have many assets. It’s perfectly fine to include $0 for certain lines if that’s true for you.
3. Set a value for intangible assets
Typically, people hire a legal team to assess and calculate the value of intangible assets. However, other methods can estimate the value of an intangible asset.
In a market approach, you determine the market value of an intangible asset by comparing it to the value of the same asset sold by a comparable business. For example, if your business has a patent for a production process, and a similar business recently sold its patent for $67,000, you would value your patent at $67,000.
Not every intangible asset needs a value. For example, if you used an external designer to develop your logo, you could use a market approach to help determine what your logo might sell for in an open market. On the other hand, if your logo is simple text, it may not reach a threshold of creativity to be protected and, therefore, saleable.
How to read a balance sheet
When reading a balance sheet, a higher stockholder equity is better. It means your assets are higher than your liabilities. Balance sheets are used primarily to assess equity in a specific moment, but you can also compare year-over-year changes to assets and liabilities to see how your business value has changed over time—and why.
For example, in 2021, say a business’ assets increased by $15,000, from $235,000 to $250,000. Also in 2021, the same business paid off a loan, reducing its liabilities by $20,000, from $70,000 down to $50,000. Previously, the stakeholder equity would’ve been $165,000 ($235,000 less $70,000). The new equity would be $200,000, an increase of $35,000—helped by a growth in assets and a reduction in liabilities.
That kind of increase would make your business a more attractive candidate for a loan or investment. But it may take time to get there. Even if you’re a new company and your balance sheet is in the red for stockholder equity, you need to know where you stand. It’s your best chance to get into the black—and stay there.
Illustration by Francesco Ciccolella