Every business owner should be able to draw up and use a balance sheet - and be able to understand it. It helps you stay on top of cashflow and manage debt. A balance sheet is also used to assess the value of your business: it's one of the first things an investor or bank manager will want to see. It's useful for your annual accounts too.
What is a balance sheet?
A balance sheet gives a snapshot of the financial state of your business, measured in assets and liabilities. Assets include: cash, inventories, accounts receivable from customers, property and equipment. Liabilities include: bank debt and accounts payable to suppliers or creditors.
What's in a balance sheet?
Anything within or owed by your business that has monetary value is included in the balance sheet. Everything is then split into four groups.
Things that can be liquidated (sold for cash) within one year, including stock, cash, and money owed by customers, are current assets. Think of "current" as short-term.
Fixed assets, on the other hand, are more long-term, including property, machinery, patents and long-term investments.
Current liabilities are what the business owes in the short-term: money owed to suppliers, taxes due, short-term loans and overdrafts.
Long-term liabilities are what the business owes in the long-term - to be paid after one year, as well as capital and reserves.
Total assets are the combined value of all assets, remembering to account for depreciation and interest - and total liabilities.
What you're aiming for
Total assets should equal liabilities plus owner's equity if everything's calculated correctly - if you sold all the assets and paid off the liabilities, what you'd have left is the equity.
Your current assets should always be greater than your current liabilities. If they are, you're generally able to pay bills and can survive unexpected costs.
Ideally, a healthy business has current assets that are twice the current liabilities. If your current assets are smaller than current liabilities, you may struggle financially.