What is a Balance Sheet?
A balance sheet is a financial statement that shows your business's financial position at a specific point in time. It lists everything your company owns (assets), everything it owes (liabilities), and the owners' stake in the business (equity). The fundamental equation is: Assets = Liabilities + Equity.
Why Lenders Need Your Balance Sheet
- Liquidity Assessment: Can you pay short-term debts? Current ratio shows this
- Debt-to-Equity Analysis: How leveraged is your business?
- Asset Quality: What collateral is available for the loan?
- Working Capital: Do you have enough capital to operate the business?
Balance Sheet Structure
Sample Balance Sheet
As of December 31, 2024
ASSETS
LIABILITIES & EQUITY
Key Balance Sheet Ratios Banks Calculate
Current Ratio
Current Assets / Current Liabilities
($315,000 / $140,000)
Above 1.5 is considered healthy. Shows ability to pay short-term debts.
Debt-to-Equity Ratio
Total Liabilities / Total Equity
($320,000 / $325,000)
Below 2.0 is preferred. Shows how much debt vs. equity funds the business.
Working Capital
Current Assets - Current Liabilities
($315,000 - $140,000)
Positive working capital means you can fund daily operations.
Quick Ratio
(Cash + Receivables) / Current Liabilities
($205,000 / $140,000)
Above 1.0 is good. Excludes inventory for stricter liquidity test.
What to Include on Your Balance Sheet
Assets
- Cash & bank accounts
- Accounts receivable
- Inventory
- Prepaid expenses
- Equipment & machinery
- Vehicles
- Real estate/property
- Intangible assets
Liabilities
- Accounts payable
- Credit card balances
- Short-term loans
- Accrued expenses
- Payroll liabilities
- Long-term debt
- Mortgages
- Equipment loans
Equity
- Owner's capital
- Partner contributions
- Common stock
- Preferred stock
- Retained earnings
- Current year profit
- Owner's draws (negative)
- Distributions (negative)
Tips for an Accurate Balance Sheet
- Must balance: Total Assets must equal Total Liabilities + Equity. If not, check your numbers
- Use fair market value: Real estate and equipment should reflect current values, not purchase price
- Include all debts: Don't forget credit cards, shareholder loans, or lines of credit
- Reconcile with bank: Cash balance should match your bank statements