For those who haven’t been immersed in business and finance, any topic within those realms can be daunting. Take for example, “balance sheet”. Most people have probably heard that term, but how many of us actually know what it means? That great bastion of academic rigor, Wikipedia, defines a balance sheet as “a summary of the financial balances of an individual or organization.” Still confused? Another way to put is that the balance sheet “refers to a financial statement that reports a company’s assets, liabilities and shareholder equity” (Fernando, Investopedia). The balance sheet is based on the following equation:
Assets = Liabilities + Equity
I am a visual person, and so I view a balance sheet as literally a balance or scale with assets on one side and liabilities and equity on the other side. If you’ve seen my logo, you know how much I dig balance. Assets will always equal the sum of liabilities and equity. If they don’t… call me. You need a new bookkeeper.
“Ok, Wesley. We know what a balance sheet is now.
Why should we care?”
Excellent question. Glad I asked. A balance sheet provides you with information on a business, how it’s doing, what it’s worth etc. Say you own your own business. You definitely want to know how it’s doing, at least you should… But even if you’re just looking to invest in a business, you want to be able to know how they’re doing and compare them to other similar businesses. What if you’re looking to expand your business and need a loan to purchase a vehicle or building? The bank is going to want to see your balance sheet, so you better have it ready.
“Fine. We get that we need a balance sheet for our business. How do we go about getting one and making sure it’s accurate?”
Yet another excellent question. I’m really nailing it today! You want to start by making sure you’re keeping your business’ books. I recommend using some software to do so. Check out another one of my articles here to see why you should be using software to keep your books. Software like QuickBooks Online (QBO) is an excellent solution to make sure you have an up-to-date and accurate balance sheet. Of course, it’s not a silver bullet. Your balance sheet is only as good as the data that you put in the system. It does simplify and automate things to make it easier to keep your books up-to-date and accurate though. You can also team up with a bookkeeping or Certified QuickBooks ProAdvisor, like yours truly, to help maintain your books and get the most out of your balance sheet.
I hope this brief post helped explain what a balance sheet is. I intend to tackle other topics for explanations and simplifications such as assets, liabilities, and equity. If there’s a topic you’d like me to address, please let me know at wesley@getstatera.com. If you’ve realized your need for an accurate balance sheet and want some help getting going in the right direction, you can book a call here and I’ll be happy to help!