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What’s a Balance Sheet?

By W.W. Mayes

While I do believe that a business is its people, you must also have money to be in business. Over the years, I have had more small business people complain about this one area than anything else: managing the numbers. I have had more excuses given to me by business owners for having poor-to-no real accounting books on their business.

The problem is that you have no idea where you are, where you have been and if you even can stay in business to ask where you are going without good accounting. I can’t count how many business owners use their checking account balance to tell them if they are alright. The crazy thing about this is that while this is madness in itself, their checking accounts weren’t even balanced. With the availability of user-friendly programs such as Quick Book, there are no valid excuses for not keeping good books if there ever were any such good excuses.

The first two accounting terms a business owner must understand are Assets and Liabilities.

Projecting your balance sheet can be quite a complex accounting problem, but that does not mean you need to be a professional accountant to do it or to benefit from the exercise. The desired result is not a perfect forecast but rather a thoughtful plan detailing what additional resources will be needed by the company, where they will be needed and how they will be financed. Using your last historical balance sheet as a starting point, project what your balance sheet will look like at the end of the 12 month period covered in your Profit & Loss and Cash Flow forecasts.

How will the year’s operations affect assets, debts and owners’ equity? For example, if you are planning significant sales growth in the coming year, go through the balance sheet item by item and think about the probable effects of assets.

ASSETS: Inventory and Accounts Receivable will have to grow. New equipment may be needed for increased production. You may draw down on cash to finance some of this. Now, since a balance must balance, you need to consider the effects on the other half of the statement, liabilities and equity.

LIABILITIES & EQUITY: Some of the growth may be financed by profits retained in the business as Retained Earnings. Your Profit and Loss Projection will tell you how much might be available from that source. Funds may be contributed by the owners through contributions of more invested capital or loans to the company (notes payable to stockholders). Suppliers may provide some of the financing via increased Accounts Payable. The rest will have to be financed by borrowing, which can be short term loans (due within twelve months) such as a line of credit or by long-term debt (maturity greater than twelve months).

Technical Tips:
1. Your firm’s balance sheet no doubt has more lines than the template. For clarity and ease of analysis, it is recommended that you combine categories to fit into this compressed format.
2. As always, for projections, we recommend that you condense your numbers. Most people find it useful to express the values in thousands, rounding to the nearest hundred dollars; for example, $11,459 would be entered as 11.5.
3. In the Fixed Assets section, the “LESS accumulated depreciation” figure is the total of all depreciation accrued over the years on all fixed assets still owned by the company. Be sure to enter it as a negative number so the spreadsheet will subtract it from Total Fixed Assets.
4. In Owners’ Equity, “Retained Earnings-Beginning” is retained earnings as of the last historical balance sheet or the end of the last fiscal year. “Retained Earnings-Current” is net profit for the period of the projections, less any owner’s draw (for partnerships and proprietorships) or dividends paid (for corporations).

The following are the itemized items to be used for calculating the Assets and Liabilities column of your balance sheet:

BALANCE SHEET As Of __________ (Date)
Current Assets
Cash in Bank
Petty Cash
Net Cash
Accounts Receivable
Prepaid Insurance
Total Current Assets
Fixed Assets
Less Depreciation
Net Land & Buildings
Less Depreciation
Net Equipment
Current Liabilities
Accounts Payable
Vacation Payable
EI Payable
CPP Payable
Federal Income Tax Payable
Total Customs & Revenue
WCB Payable
Pension Payable
Union Dues Payable
Medical Payable
PST Payable
GST Charged on Sales
GST Paid on Purchases
GST Owing
Total Current Liabilities
Long-Term Liabilities
Long-Term Loans
Total Long-Term Liabilities
Owner’s Equity – Capital
Owner – Draws
Retained Earnings
Current Earnings
Total Earnings

Once again, the above template is an example of the different categories of assets and liabilities that may apply to your business. The Balance Sheet will reproduce the accounts you have set up in your General Ledger. You may need to modify the categories in the Balance Sheet template above to suit your own business.

Once you have your Balance Sheet completed, you’re ready to write a brief analysis of each of the three financial statements. When you’re writing these analysis paragraphs, you want to keep them short and cover the highlights rather than writing an in-depth analysis. The financial statements themselves (the Income Statement, Cash Flow Projections, and Balance Sheet) will be placed in your business plan’s Appendices.