Along with the Income Statement, the Balance Sheet will provide you with the data necessary to make sound financial decisions. The Balance Sheet lists the assets and the liabilities of the company. The difference between your assets and liabilities will be the net worth of the business at the end of a specific period (Assets - Liabilities = Net Worth). The net worth of your business at a given time is of particular interest to prospective investors.
The assets of the business are that which have a cash value including:
Investments held by the company Equipment Machinery Display cases Inventory Cash and cash equivalents Accounts Receivable
Capital assets, or fixed assets, are the long-term assets, such as any building the company owns or the machinery used to produce goods. These are assets that are expected to be around for several years. They are also assets that can depreciate over the years, such as the new computer you purchased last year. Accumulated depreciations are deducted from your list of fixed assets. On the other hand, a building that you own might appreciate in value. This, however, is not reflected on the balance sheet until the building is actually sold.
The liabilities are all of the debts that the business owes. This may include:
Money owed on equipment The mortgage on your building Accounts payable Accrued wages (which are wages owed to employees) Insurance and health benefit payments
Once you get a total of your liabilities you will add the Owner’s Equity in the business, which consists of how much he or she has invested into the business and how much of the profits are still in the business. This is essentially the net worth of the business. Therefore, you would list on the balance sheet:
Invested Capital Retained Earnings
Added together you will get the owner’s equity. This total, together with the total liabilities should balance with your total assets. Hence the name "Balance" Sheet.
In addition to a Balance Sheet and Income Statement, you will want to keep a Statement of Cash Flows, which allows you to track the cash in and out of your company throughout the year. All manners in which the company uses cash can be recorded, including operating, financing and investing activities. By listing both the previous and current cash amount on the Statement of Cash Flows you will be able to determine the increase or decrease in each activity for a specified time period.
Click here for sample financial statements, including a Balance Sheet, Income statement and Statement of Cash Flows.
As part of overseeing the financial health of your company, you'll also need to monitor your cash flow. Our plain-English guide to cash flow management tools explains the numbers you should watch, and it also tells you how to choose a program that can help you analyze your cash flow. Check out The Scoop on Cash Flow Management Tools now!