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5 Reasons Why Balance Sheets Are Important for Small Business

by nolanacct | Apr 25, 2021 | Small Business Accounting

One of the biggest challenges for small business owners is keeping up with bookkeeping and financial reporting tasks. Balance sheets are an important piece of financial information that every business owner needs to understand in order to monitor the financial health of their company. Together with income and cash flow statements, balance sheets provide business owners the financial data needed to make informed decisions.

What’s Included in a Balance Sheet?

A balance sheet provides a snapshot of a company’s assets, liabilities, and equity at the end of an accounting period. These three categories allow owners and potential investors and lenders to evaluate the overall financial health of a business:

• Assets are resources that generate revenue (or sales) and profits in a business. An asset may be tangible, like a vehicle, or intangible, like a patent or other intellectual property.
• Liabilities are amounts owed to other parties, including accounts payable (current liabilities) and long-term debt, including bank loans.
• Equity is the difference between assets and liabilities. It reflects the true value of a business. Equity is also referred to as shareholder equity, owner’s equity, or net worth.

At the core of the balance sheet is the accounting equation: Assets = Liabilities + Equity. A balance sheet shows what your company owns versus what it owes at a specific moment in time. If total assets do not equal liabilities and equity, the balance sheet is considered “unbalanced.”

Uses for Balance Sheets

Balance sheets are important for several reasons. They reflect important financial data that are used in the course of business transactions. Some typical uses for balance sheets include:

1. To Evaluate Risk and Return

A balance sheet lists all of your business assets and liabilities in one place. Current and long-term assets reflect your ability to generate cash and sustain operations. Short- and long-term debts prioritize your financial obligations.

Ideally, you would have more assets than liabilities, indicating a positive net worth. If your current liabilities exceed your cash balance, your business will likely require additional working capital from lenders or investors. A balance sheet can also reveal when debt levels are unsustainable.

2. To Secure Loans and Investors

Your balance sheet allows people to quickly understand the financial condition of your business. Most lenders require a balance sheet to determine a business’s financial condition and creditworthiness.

If you apply for a loan, your financial statements can help demonstrate to lenders that you are likely to repay your debts in a timely manner. Potential investors use balance sheets to understand where their funding will go and when they can expect to see a return on their investment.

3. To Make Long-Term Business Decisions

Tracking your business finances can help you identify potential issues before they become major problems. Most small businesses fail because of cash flow problems that can be identified early and corrected if balance sheets are accurate and up-to-date.

Small business owners often underestimate the importance of budgeting, overspend on startup costs and wait too long to seek credit. These common financial problems can be avoided by creating a sound business plan and using financial statements to guide business decisions.

4. To Prevent Potential Problems

The primary reason for a business is to make a profit. A well-run business should show increasing equity. If your business isn’t doing that, looking at specific assets and liabilities on your balance sheet can help you figure out why.

For example, if most of your assets are inventory, that could be creating unnecessary risk. Inventory that doesn’t sell can quickly become a serious liability.

5. To Make Tax Preparation Easier

Keeping accurate business records is important for both tax planning and preparation. The IRS recommends that small business owners maintain organized and up-to-date financial records in order to prepare accurate tax returns.

With your financial statements in order, your accountant or tax preparer will be able to accurately prepare your returns and ensure that you are not paying more taxes than you should. And in the event of an IRS audit, you will be required to present a complete set of financial records for inspection, including financial statements and receipts.

Know Your Business’s Financial Status

Preparing and understanding your company’s financial statements is an essential part of being a successful small business owner. The balance sheet is particularly important because it keeps you and other stakeholders informed of your financial position. Keeping this information updated can help you make better management decisions. In addition, it can help improve your operational efficiency, borrowing, and overall financial health.

Unless you’re a financial expert, trying to handle all of your business accounting tasks on your own is probably not the best use of your time. Whether you are just starting out or are an experienced business owner, outsourcing your bookkeeping and accounting is a smart idea.

A professional accounting firm will have the experience and resources to make sure your accounts are in order. They can help you understand and use your financial statements to improve your business operations.

Get the Accounting Expertise You Need

At Nolan Accounting Center, we pride ourselves on building strong relationships focused on success. Because our firm is relatively small, our clients benefit by receiving personalized service. By regularly meeting to review your financial statements, we can help you evaluate your financial situation and determine next steps for maximizing your success.

Nolan Accounting provides a full range of accounting, tax preparation, bookkeeping and payroll services to small business owners in Southeast Wisconsin. We look forward to working with you to meet your financial goals.

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How to write a balance sheet for a business plan

Table of Contents

What is a balance sheet?

Elements of a balance sheet, liabilities, how to write a balance sheet, manage your business finances with countingup.

A balance sheet is one of three major financial statements that should be in a business plan – the other two being an income statement and cash flow statement .  

Writing a balance sheet is an essential skill for any business owner. And while business accounting can seem a little daunting at first, it’s actually fairly simple. 

To help you write the perfect balance sheet for your business plan, this guide covers everything you need to know, including:

• What are assets?
• What are liabilities?
• What is equity?

A balance sheet is a financial statement that shows a business’ “book value”, or the value of a company after all of its debts are paid. 

For those inside the business, it provides valuable financial insights, allowing the owners to assess their current financial situation and plan for the future. 

For external investors, a balance sheet lets them know whether it’s a worthwhile investment.  

Putting a balance sheet together isn’t all that difficult. You just need to know the value of three things:

• Owner’s equity

Once you know these three figures, there’s just a little bit of maths – nothing too scary though.

Assets are items or resources that have financial value. They might be physical items, machinery and vehicles, or they could be intangible items, like copyrights or brand identity .

Assets are separated into two groups based on how quickly you can turn them into cash. There are current assets and fixed assets. 

Current assets are things that are fairly simple to value and sell, such as:

• Stock and inventory
• Cash in the bank
• Money owed to you (through unpaid invoices )
• Customer deposits
• Office furniture, equipment or supplies
• Phones or laptops
• Even relatively trivial items like a coffee machine or pool table

Fixed assets are valuable items that take much longer to sell, such as:

• Property or buildings
• Specialised equipment for your business operations
• Investments
• Vehicles 

On your balance sheet, the asset column is the simplest. All you need to do is list each item your business owns, along with their individual values, in a separate column. Then, add up the values to get a total at the bottom. 

Liabilities are the funds that you owe to other people, banks, or businesses. They can be:

• A business loan (the total, not the monthly payment amount)
• A mortgage or rent payment on a property
• Supplier contracts you owe
• Your accounts payable total
• Other financial obligations, such as paying wages or freelancers for support
• Taxes you’ll owe to HMRC

List these in the same way you did with your assets – on a spreadsheet with their values in a separate column. 

When you know the value of your assets and liabilities, working your equity is simple – it’s just the total value of your assets, minus the total value of your liabilities. 

Record the owner’s equity in the same column as your liabilities. When you add them all up, it should be the same value as your assets. 

After you’ve totalled up your assets, liabilities, and owner’s equity, all that’s left to do is fill in your balance sheet. 

Using a spreadsheet, record your assets on the left and your liabilities and owner’s equity on the right. 

For example, here’s what a balance sheet might look like for a painter and decorator:

If you’ve recorded everything correctly, both sides should have the same total. Whenever you make a change, the balance sheet will change, but it should still be balanced. 

For example, let’s say our painter and decorator sold their equipment. In that case, they’d lose an asset worth £200, but they’d also gain £200 in cash, so the asset total would stay the same. 

Alternatively, let’s say they lost the equipment altogether and got no money for it. In that case, they’d lose £200, leaving their asset total at £5,600. Then, they’d have to adjust the other side, so it remains balanced, like this:

If your two totals are not balanced, it’s most likely for one of these reasons:

• Incomplete or missing information
• Incorrect data entry
• A mistake in exchange rates
• And inventory miscount

Basically, if things don’t look right, try not to panic. It’s normally a simple mistake, so go over the figures again and you’ll find the culprit. 

The trickiest part of writing a balance sheet for a business plan is accurately recording financial information. 

With the Countingup business current account, you’ll have access to a digital record of all your transactions in one simple app, giving you all the financial information you’ll need for a business plan.

Start your three-month free trial today. 

Find out more here .

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What is a Balance Sheet and why is it important in your Business Plan?

• EntrepreneursGateway.com Team
• November 3, 2018

If you are starting a business or thinking about writing a business plan , you might have heard the term ‘balance sheet’ .

This section will help you understand the basics of the balance sheet and why it’s so important to include it within your business plan.

This article is part of the Business Planning Hub , where you’ll find lots of guides and resources to help you create the perfect business plan!

Table of Contents

Once you understand the basic idea of a balance sheet, it’s pretty easy.

Basically, it shows your company’s:

Liabilities

• Owners’ equity (at a particular time)

A company’s balance sheet shows what that company owns (which is defined as ‘assets’) and what the company owes (also known as ‘liabilities’), as well as how much both the owner and shareholders have invested (which is known as ‘equity’).

And just like it sounds…

A balance sheet will always need to balance!

Assets are shown on one side and both the liabilities and equity are shown on the other side.

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If you think about it logically…

A business needs to pay for all it owns (its assets).

It can do this by either borrowing money (liabilities) or by having the business owners or investor put money into the business (equity).

A balance sheet also gives you an indication of what the company’s net worth is.

To determine what your company’s net worth is, you subtract your liabilities from your assets.

But let’s look deeper into what information should be included in a balance sheet…

And while you’re at it….why not download our FREE Balance Sheet Template?

Below, we will cover:

• The different components of a balance sheet
• Why it’s important to include a balance sheet when you create your business plan
• Examples of a Balance Sheet

#1 Breakdown of a Balance Sheet:

Assets and liabilities differ from business to business – because each one is different. Although titles and item lines may change, the equation won’t .

The assets of a business are reflected by the liabilities plus equity . 

For the purpose of the balance sheet, this means money that is currently available to hand .

In business planning, however, the term ‘cash’ refers to the bank or checking account of the business, also known as ‘Cash and Cash Equivalents’ (CCE). What a cash equivalent is, is basially an asset that is easily converted from liquid to cash.

Accounts Receivable:

This refers to the amount of money that is owing but hasn’t been paid (the ‘receivables’). Typically, this is sales on credit, usually from businesses to business sales.  

Included in this is the value of all-ready materials and finished goods that the business has to hand but isn’t using.

Current Assets:

Inventory, cash, and accounts receivable are all deemed current assets, and often these amounts accumulated are referred to on balance sheets as “Total Current Assets”.

Long-term Assets:

These are also known as “fixed assets” and included are items that have a long-standing value, like equipment or land.

Accumulated Depreciation:

This is where the value of the asset depreciates over time.

An example of this could be a company vehicle; with time, the car becomes less valuable.

Total Long-Term Assets:

On a balance sheet, this usually refers to depreciation or to describe long-term assets.

Accounts Payable:

This is the flip side to ‘accounts receivable’ – in other words, money that the business owes. The accounts payable figure is made up of the regular bills that the business is expected to pay. 

Sales Taxes Payable:

This is only applicable to businesses that don’t immediately pay sales tax. An example could be a business that pays it on a quarterly basis.

Short-Term Debt:

This is usually short-term loans or any debt that needs to be repaid within a year. This is also referred to as current liabilities or short-term loans on balance sheets. 

Total Current Liabilities:

The current liabilities are the above numbers which are added together and which the business must settle within one year.

Long-Term Debt:

These are the financial responsibilities that take over a year to repay. Usually, this is a larger number and won’t include interest. An example could be a long-term loan.

Total Liabilities:

This includes everything outlined above that needs to be paid out or repaid.  

This is money that is paid back into the company as equity investments via the owners.

Retained Earnings:

This covers earnings or losses that have not been paid out as dividends to the owners, and that have been re-invested into the company. If the retained earnings are negative, then this means that the company has accumulated losses.

Net Earnings:

This number is really important. The bigger it is, the more profitable the company is. It is sometimes also referred to as net profit or income. 

Total Owner’s Equity:

This is also referred to as capital as means business ownership. Equity itself can be calculated as being the difference between liabilities and assets. 

Total Liabilities and Equity:

This is what was outlined at the beginning of this article:

assets = liabilities + equity

#2 How to use a Balance Sheet

The importance of a balance sheet in your business plan.

It is vital to include a balance sheet within any business plan, as it is a really important part of the financials. 

The three indispensable aspects of business financials are the cash flow statement , the income statement , and the balance sheet. 

These enable anyone looking at the numbers to get a solid overview of how the business is functioning financially.

The balance sheet will also illustrate how much assets are worth and whether the company is in debt – all being information which is critical in creating a business plan and managing a business. 

One of the key powers your balance sheet has is to flag up if you have any cash flow issues.

There are two ratios that can be calculated from the balance sheet which are easy to understand. These ratios will show whether or not your business will have enough cash flow for meeting any current financial obligations. These are:

Current Ratio

Quick ratio.

Current ratio is also known as a liquidity ratio . What this means is whether or not your business has enough current assets (liquid) available to pay for expenses such as bills and operational costs. It’s used to measure your short-term health of the business.

We express this as being the number of times the current assets exceed the current liabilities.

Stick with me…

So, the higher the current ratio is, the better for the business!

The Formula:

Current ratio = current assets / current liabilities.

The best current ratio is considered to be between 1.2 to 2.

What does this mean?

Basically, if you have a business whose current ratio is below 1, you won’t have enough current assets to be able to cover its short-term liabilities.

If you have a current ratio that is equal to 1, this indicates that both current assets and current liabilities are equal, resulting in the business just being able to cover any obligations, short-term.

The Importance of the Current Ratio

The current ratio gives an overview of the short-term health of your business and will give you an early warning as to whether the businesses is working efficiently or not.

You can also attract more favourable credit terms if you were to require financing, as investors will be able to see how you are going to run the business whilst also keeping afloat with any current obligations.

This ratio is also referred to as the ‘acid test’ ratio. It excludes any inventory.

This is used to determine your businesses ability to meet short-term obligations with liquid assets that are easily and quickly converted to cash, which are normally 90 days (or in the short-term).

Current Assets – Inventory / Current Liabilities

A quick ratio of 1.5 to 1 is the average.

The Importance of the Quick Ratio

The quick ratio shows a conservative overview of your businesses financial standing. It determines whether or not your business has the resources to be able to meet its operating expenses, accounts payable, and other obligations short-term.

Knowing your industry’s standards is an important part of evaluating your business’s balance sheet effectively.

#3 Balance Sheet Examples:

Example of a Balance Sheet Forecast

Review & update your balance sheet

It is recommended that you update your balance sheet every quarter, as it’s a useful tool, if used properly.

Why not have a go at creating your own balance sheet?….why not download our FREE Balance Sheet Template?

Additional Resources:

To help you even further in creating your business plan, why not check out the following articles to help you in writing the perfect plan to impress:

• 5 Financial Plan Must Haves and How to Write one
• How to Do a Sales Forecast
• How to Build a Profit and Loss Statement (Income Statement)
• How to Forecast Cash Flow
• The Difference Between Cash and Profits
• Balance Sheet Template [Free Download]
• Cash Flow Template [Free Download]
• Profit and Loss Template [Free Download]

Now, over to you...

Now I’d love to hear from you:

Are you still unsure of which business plan you need?

Maybe you have written a business plan and would like us to review it?

Leave any comments below and I will be sure to answer as soon as they come in!

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What Is a Balance Sheet and Why Does Your Business Need One? Need help figuring out what a balance sheet is and how it works? Learn what a balance sheet is, and see examples in this detailed guide.

By Dan Bova Dec 30, 2022

When you want to know a company's financial health , it helps to look at its balance sheet . But if you've never seen a balance sheet before or don't know how to read one, all you'll see is a collection of impenetrable numbers and strange terms.

You've likely heard about line items and balance-sheet-related terms like working capital, net income, net assets or bonds payable; however, without a cursory understanding of how balance sheets work, these terms can confuse you.

This article will solve that by breaking down balance sheets in detail, explaining what a balance sheet is, and how it works, as well as showing you some balance sheet examples.

Related: Balance Sheet - The Entrepreneur Small Business Encyclopedia

What is a balance sheet?

A balance sheet is a detailed financial statement that breaks down all of a company's assets , liabilities, and equity at a specific time, such as the end of a month, the end of a quarter or the end of a year.

You can also make balance sheets for "random" points in time to see how a company is doing at any given moment. No matter when you make one, a balance sheet allows you to evaluate a business's capital structure and determine how profitable it is relative to its expenses.

Think of a balance sheet as a snapshot exploring what a company owns and owes and how much shareholders invest.

Balance sheets, combined with other financial statements, allow investors and business owners to analyze business performance and make the wisest decisions possible.

Related: Financial Statement - The Entrepreneur Small Business Encyclopedia

What are the major components of a balance sheet?

All balance sheets are comprised of three primary sections — here's a detailed breakdown of each:

First, you'll find a breakdown of the company's assets. The assets are everything that a company owns that has a dollar value. More specifically, a company can turn assets into cash at some point.

Current assets can impact a company's financial position and can include the following:

• Money in business checking accounts.
• Physical products and equipment, such as inventory.
• Prepaid expenses.
• Short-term investments.
• Money in transit, like money from invoices.
• Accounts receivable, which is any money owed to a business by its customers.
• Cash equivalents, like stocks, bonds, marketable securities, and foreign currencies.

However, this is by no means a comprehensive list of all total assets, which would also include non-current assets (long-term investments) that a company does not expect to liquify within a given fiscal year.

Additionally, assets can be tangible things, such as business buildings or equipment.

Intangible assets include things like intellectual property, copyrights and trademarks. Note that tangible assets are usually subject to depreciation, so they lose value over time.

Assets may be further broken down into both long-term and short-term assets. You can sell short-term assets relatively quickly, typically in less than a year.

They include the majority of the assets described above. Long-term assets are things like buildings, land, corporate machinery and equipment.

Liabilities

Next on a balance sheet should be liabilities. Liabilities are any of the financial debts or obligations that a company has. Liabilities should be listed by the due date, with the debts or liabilities that are due the soonest listed on top.

Total liabilities can include but are not limited to:

• Taxes owed, including upcoming tax liabilities.
• Accounts payable or money owed to suppliers for items purchased on credit.
• Employee wages for hours already worked.
• Loans you must pay back within a year.
• Credit card debt.

Liabilities can be broken down into current liabilities and non-current liabilities. These are essentially long-term liabilities that don't have to be paid back or settled within the year and can include the following:

• Long-term debt or loans.
• Bonds issued by a company.

You'll need to calculate all liabilities to complete balance sheet accounting equations, practice good bookkeeping and complete or calculate other financial ratios using programs like Excel or others.

Equity is the other significant section of a balance sheet. It's any money currently held by the company. It can be called shareholders' equity, stockholders' equity, owner's equity or similar names. In any case, this balance sheet section should break down what belongs to business owners and the book or monetary value of any investments.

Equity can include:

• Capital in the business — this is how much money the owners have invested into the business.
• Public or private stock.
• Retained earnings, which can be calculated by adding up all revenue minus expenses and distributions.

Note that equity may decrease if an owner takes money out of the company to pay themselves. Equity can also decrease if a corporation issues dividends to shareholders.

All three of these sections combined to tell you what the company owns, what it can turn into cash if it sells those things and what debt obligations it has or the money it owes.

Major balance sheet equation

In a broad sense, every balance sheet's numbers should add up properly according to the following equation:

Assets = liabilities + shareholders' equity

All of the company's remaining assets are the same as its liabilities, added with the equity from its shareholders. The company has to pay for all these things by borrowing money (i.e., liabilities) or by taking value from investors (i.e., issuing shareholder equity).

How does a balance sheet work?

Balance sheets provide clear-cut, mathematically accurate information about a company's finances for a given moment. For instance, if a potential investor wants to know whether a company is a good investment, they may request a balance sheet.

The balance sheet can tell them:

• What the company owns, and what its general profits are.
• What the company owes in terms of debt or liability, which can tell the investor whether the company is a risky investment.
• What the equity in the company is, which tells the potential investor whether investing in the company may provide them with profits later down the road.

Investors can use different ratios and formulas using the numbers on a balance sheet to determine a company's financial well-being. These include debt-to-equity ratios and acid test ratios.

Along with an income statement, an earnings report, and a statement of cash flow, an investor has everything they need to determine the state of a company's finances.

Related: A Guide to the Top Three Financial Reports for Small Businesses

Balance sheets should always balance

Whether you're an investor or business owner, remember that a balance sheet should always "balance." This is where balance sheets get their names.

Put more simply, the company's assets should equal liabilities and shareholder equity.

If for whatever reason, the numbers on a balance sheet do not balance, there are problems, which can include:

• Inaccurate or incorrect data.
• Misplaced data (such as one number being put in a spot where it should be somewhere else).
• Errors with inventory or exchange rate.
• Miscalculations.
• Deliberate falsifications on the part of shareholders, company owners, or accountants.

Why are balance sheets important?

Balance sheets can be essential for every company, regardless of size or operating industry, because of their many benefits.

In short, balance sheets help investors and business executives determine risk. Because it is a comprehensive financial statement, it explores everything that a company owns and everything that the company owes in terms of debt or liability.

In this way, someone looking at a balance sheet can easily assess the following:

• Whether a company has overextended, such as whether it has borrowed too much money.
• Whether the company has enough liquid assets to pay off its debts in the event of liquidation.
• If the company has enough cash on hand to meet current debt obligations.

Related: Use a Balance Sheet to Evaluate the Health of Your Business

Balance sheets are also important because they are a prime means to secure investment capital. Business owners usually have to provide balance sheets to potential investors, whether individual investors or large corporations like banks and credit unions. No investor is likely to put money into a business unless they look at a balance sheet first.

In the long term, balance sheets are essential tools that managers can use to determine profitability, liquidity, and other metrics for their company.

Once they have this information, they can make wise decisions, such as paying down company debts instead of expanding during a costly, risky period of time.

What might you need beyond balance sheets ?

Balance sheets are excellent financial documents to have and understand, but you can't just use these to understand the company thoroughly. There are some limitations and drawbacks to balance sheets.

For example, balance sheets are static, so they have to be updated regularly. Because of this, an out-of-date balance sheet may not give an accurate picture of a company's financial health. A company might look financially healthy on one day and appear to be heading toward insolvency on another.

Because of this, it's a good idea for investors, business owners, and managers to also acquire cash flow statements, income sheets, and other financial documents if they want to determine a company's holistic, comprehensive health.

Balance sheet example

The best way to truly grasp balance sheets is to look at concrete examples. While you can create balance sheets using Microsoft Word and other word processors, you can also check out premade sample balance sheets from Accounting Coach.

These example balance sheets include fake corporations with real numbers and equations. They also include balance sheets in different forms, such as account form balance sheets and report form balance sheets.

Check out these example balance sheets to see how these documents should look when correctly filled out. Try filling in a balance sheet template like your company's balance sheet to get a practice picture of your company's financial position.

So, what are the takeaways about balance sheets?

Balance sheets are relatively easy to scan once you know what to look for.

More importantly, balance sheets can tell you a lot about the company's financial health and help you make wise business or investment decisions depending on your goals.

Running a business means more than just reading your balance sheet accurately, though.

Interested in learning more about professional finances? Check out Entrepreneur's other guides and financial resources today .

Entrepreneur Staff

VP of Special Projects

Dan Bova is the VP of Special Projects at Entrepreneur.com. He previously worked at Jimmy Kimmel Live, Maxim, and Spy magazine. His latest books for kids  include  This Day in History , Car and Driver's Trivia Zone ,  Road & Track Crew's Big & Fast Cars , The Big Little Book of Awesome Stuff , and  Wendell the Werewolf . 

Read his humor column This Should Be Fun  if you want to feel better about yourself.

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Business Plan Balance Sheet: Everything You Need to Know

Preparing a business plan balance sheet is an important part of starting your own business. 3 min read updated on September 19, 2022

Preparing a business plan balance sheet is an important part of starting your own business. The balance sheet serves as one of three crucial parts of the company's financials along with cash flow and the income statement. The basics of the balance sheet include a few straightforward parts:

• Company assets.
• Liabilities.
• Owner's equity.

The balance sheet will also include income and spending that isn't represented in the profit and loss statement. For example, it will show loan repayments and the purchase of new assets. Additionally, the money that is taken in as a new loan will not show up on the P & L either.

Accounts receivable, or the money you are waiting to receive from your customers, will show up as an asset on your balance sheet and as it is not yet reported as income on your P & L statement. A balance sheet is your business's representation of why your profits are not yet considered cash. It creates the broad financial picture of your business while the profit and loss statement will show the company's financial performance over a set length of time.

A balance sheet always has to balance. It will have assets on one side and liabilities and equity on the other. The basic formula that a balance sheet follows is Assets = Liabilities + Equity. In the end, it is the balance sheet that will show a company's net worth. To determine net worth at any given time, all you need to do is subtract the liabilities from the assets.

Balance sheets are used for planning and not accounting which is one of the principles of lean business planning. To get a useful cash flow projection, you will need to summarize the aggregate of the rows on the balance sheet. It is always important to look at a balance sheet as a tool to forecast your cash.

Components of a Balance Sheet

Just as one business will differ from another, so will the assets and liabilities of the business. Even though the titles will vary, the equation and goal remains the same. You will need to have your business assets equal your liabilities and equity .

The assets on your balance sheet will often be in order from the top to the bottom with how easy they can be converted to cash. This is called liquidity . Your most liquid assets will be on top and your least liquid on the bottom. Typically assets will be listed as follows:

• Cash — This is money currently on hands such as in checking and savings accounts. It can also include money market accounts that can be converted to cash quickly.
• Accounts Receivable — This represents money that is owed to you but has not actually been received yet. This is often credit that is extended to customers through invoicing.
• Inventory — This includes all the finished goods and materials that are ready at your place of business but has yet to be sold.
• Current Assets — These are assets that can be considered able to be converted into cash within a year or less. This includes all your cash, accounts receivable, and inventory which will all be grouped together as current assets.
• Long-Term Assets — These are fixed assets that have a long-standing value such as land and equipment. They cannot be converted to cash as quickly.
• Accumulated Depreciation — This is the value that your assets will be reduced over time due to depreciation.
• Long-Term Assets — This is the total of long-term assets plus depreciation.

Liabilities

Liabilities will be ordered for time it would take to pay them off, with current liabilities needing to be paid in a year or less and long-term liabilities longer than a year.

• Accounts Payable — This is the amount of money that your business will owe to vendors or for regular bills.
• Sales Tax Payable — If your sales tax is not paid right away, it will accrue in this account until payment is made.
• Short-Term Debt — This is usually short-term loans that will be repaid in less than a year.
• Total Current Liabilities — The total amount of debt that the business will need to pay back in a year.
• Long-Term Debt — This amount includes the financial responsibilities that will take more than a year to pay back.

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What Is a Balance Sheet? Definition, Formulas, and Example

Trevor Betenson

10 min. read

Updated May 2, 2024

Business financial statements consist of three main components: the income statement , statement of cash flows , and balance sheet. The balance sheet is often the most misunderstood of these components—but also extremely beneficial if you understand how to use it.

Check out our free downloadable Balance Sheet Template for more, and keep reading to learn the different elements of a balance sheet, and why they matter.

• What is a balance sheet?

The balance sheet provides a snapshot of the overall financial condition of your company at a specific point in time. It lists all of the company’s assets, liabilities, and owner’s equity in one simple document.

A balance sheet always has to balance—hence the name. Assets are on one side of the equation, and liabilities plus owner’s equity are on the other side.

Assets = Liabilities + Equity

• What is the purpose of the balance sheet?

Put simply, a balance sheet shows what a company owns (assets), what it owes (liabilities), and how much owners and shareholders have invested (equity).

Including a balance sheet in your business plan is an essential part of your financial forecast , alongside the income statement and cash flow statement.

These statements give anyone looking over the numbers a solid idea of the overall state of the business financially. In the case of the balance sheet in particular, what it’s telling you is whether or not you’re in debt, and how much your assets are worth. This information is critical to managing your business and the creation of a business plan.

The balance sheet includes spending and income that isn’t in the income statement (also called a profit and loss statement). For example, the money you spend to repay a loan or buy new assets doesn’t show up in the income statement. And the money you take in as a new loan or a new investment doesn’t show up in the income statement either. The money you are waiting to receive from customers’ outstanding invoices shows up in the balance sheet, not the income statement.

Among other things, your balance sheet can be used to determine your company’s net worth. By subtracting liabilities from assets, you can determine your company’s net worth at any given point in time.

• Key components of the balance sheet

Typically, a balance sheet is divided into three main parts: Assets, liabilities, and owner’s equity.

Assets on a balance sheet or typically organized from top to bottom based on how easily the asset can be converted into cash. This is called “liquidity.” The most “liquid” assets are at the top of the list and the least liquid are at the bottom of the list.

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In the context of a balance sheet, cash means the money you currently have on hand. In business planning, the term “cash” represents the bank or checking account balance for the business, also sometimes referred to as “cash and cash equivalents” or “CCE.”

A cash equivalent is an asset that is liquid and can be converted to cash immediately, like a money market account or a treasury bill.

Accounts receivable

Accounts receivable is money people are supposed to pay you, but that you have not actually received yet (hence the “receivables”).

Usually, this money is sales on credit, often from business-to-business (or “B2B”) sales, where your business has invoiced a customer but has not received payment yet.

Inventory includes the value of all of the finished goods and ready materials that your business has on hand but hasn’t sold yet.

Current assets

Current assets are those that can be converted to cash within one year or less. Cash, accounts receivable, and inventory are all current assets, and these amounts accumulated are sometimes referenced on a balance sheet as “total current assets.”

Long-term assets

Long-term assets are also referred to as “fixed assets” and include things that will have a long-standing value, such as land or equipment. Long-term assets typically cannot be converted to cash quickly.

Accumulated depreciation

Accumulated depreciation reduces the value of assets over time. For example, if a business purchases a car, the car will lose value as time goes on.

Total long-term assets

Total long-term assets is used to describe long-term assets plus depreciation on a balance sheet.

Liabilities

Like assets, liabilities are ordered by how quickly a business needs to pay them off. Current liabilities are typically due within one year. Long-term liabilities are due at any point after one year.

Accounts payable

Accounts payable is the money that your business owes to other vendors, the other side of the coin to “accounts receivable.” Your accounts payable number is the regular bills that your business is expected to pay.

Pay attention to whether this number is exceedingly high, especially if your business doesn’t have enough to cover it.

Sales taxes payable

This only applies to businesses that don’t pay sales tax right away, for example, a business that pays its sales tax each quarter. That might not be your business, so if it doesn’t apply, skip it.

Short-term debt

This is debt that you have to pay back within a year—usually any short-term loan. This can also be referred to on a balance sheet as a line item called current liabilities or short-term loans. Your related interest expenses don’t go here or anywhere on the balance sheet; those should be included in the income statement.

Total current liabilities

The above numbers added together are considered the current liabilities of a business, meaning that the business is responsible for paying them within one year.

Long-term debt

These are the financial obligations that it takes more than a year to pay back. This is often a hefty number, and it doesn’t include interest. For example, this number reflects long-term loans on things like buildings or expensive pieces of equipment. It should be decreasing over time as the business makes payments and lowers the principal amount of the loan.

Total liabilities

Everything listed above that you have to pay out or back is added together.

This is the sum of all shareholder money invested in the business and accumulated business profits. Owner’s equity includes common stock, retained earnings, and paid-in-capital.

Paid-in capital

Money is paid into the company as investments. This is not to be confused with the par value or market value of stocks. This is actual money paid into the company as equity investments by owners.

Retained earnings

Earnings (or losses) that have been reinvested into the company, that have not been paid out as dividends to the owners. When retained earnings are negative, the company has accumulated losses. This can also be referred to as “shareholder’s equity.”

This doesn’t apply to all legal structures for a business; if you are a pass-through tax entity , then all profits or losses will be passed on to owners, and your balance sheet should reflect that.

Net earnings

This is an important number—the higher it is, the more profitable your company is. This line item can also be called income or net profit. Earnings are the proverbial “bottom line”: sales less costs of sales and expenses.

Total owner’s equity

Equity means business ownership, also called capital. Equity can be calculated as the difference between assets and liabilities. This can also be referred to as “shareholder’s equity” or “stockholder’s equity.”

Total liabilities and equity

This is the final equation I mentioned at the beginning of this post, assets = liabilities + equity.

• How to use the balance sheet

Your balance sheet can provide a wealth of useful information to help improve financial management. For example, you can determine your company’s net worth by subtracting your balance sheet liabilities from your assets, as noted above.

Overall, the balance sheet gives you insights into the health of your business. It’s a snapshot of what you have (assets) and what you owe (liabilities). Keeping tabs on these numbers will help you understand your financial position and if you have enough cash to make further investments in your business.

Perhaps the most useful aspect of your balance sheet is its ability to alert you to upcoming cash shortages. After a highly profitable month or quarter, for example, business owners sometimes get lulled into a sense of financial complacency if they don’t consider the impact of upcoming expenses on their cash flow .

There are two easy-to-figure ratios that can be computed from the balance sheet to help determine whether your company will have sufficient cash flow to meet current financial obligations:

Current ratio

This measures liquidity to show whether your company has enough current (i.e., liquid) assets on hand to pay bills on-time and run operations effectively. It is expressed as the number of times current assets exceeds current liabilities.

The higher the current ratio, the better. A current ratio of 2:1 is generally considered acceptable for inventory-carrying businesses, although industry standards can vary widely. The acceptable current ratio for a retail business, for example, is different from that of a manufacturer.

Current ratio formula

Current Assets / Current Liabilities

Quick ratio

This ratio is similar to the current ratio but excludes inventory. A quick ratio of 1.5:1 is generally desirable for non-inventory-carrying businesses, but—just as with current ratios—desirable quick ratios differ from industry to industry.

Quick ratio formula

Current Assets – Inventory / Current Liabilities

Knowing your industry’s standards is an important part of evaluating your business’s balance sheet effectively.

• The limits of the balance sheet

Remember, the balance sheet alone doesn’t give you a complete view of your business finances. You’ll want to keep tabs on your profit & loss statement (income statement) and cash flow as well.

Your profit & loss statement will show you the sales you are making and your business expenses and calculates your profitability. This is crucial for understanding the core economics of your business and if you’re building a profitable business, or not.

Your cash flow forecast shows how cash is moving in and out of your business and can help you predict your future cash balances. Fast growth can reduce cash quickly, especially for businesses that carry inventory, so this is a crucial statement to pay attention to as well.

The three statements all work together to provide you with a complete picture of your business. The balance sheet also helps illustrate how cash and profits are very different things .

• Example of a balance sheet

Large businesses will have longer and more complex balance sheets for their businesses, sometimes having separate balance sheets for different segments or departments of their business. A small business balance sheet will be more straightforward and have fewer line items.

Here is a balance sheet from Apple, for example. You’ll see that it includes a complex stockholder’s equity section and several specifically itemized types of long-term assets and liabilities.

Apple’s balance sheet .

You’ll also notice that it says “Period Ending” at the top; this indicates that these numbers are reflective of the time up until the date listed at the top of the column. This terminology is used when you are reporting actual values, not creating a financial forecast for the future.

• Get familiar with your balance sheet

Most companies should update their balance once a month, or whenever lenders ask for an updated balance sheet. Today’s accounting software programs will create your balance sheet for you, but it’s up to you to enter accurate information into the program to generate useful data to work from.

The balance sheet can be an extremely useful financial tool for businesses that understand how to use it properly. If you’re not as familiar with your balance sheet as you’d like to be, now might be a good time to learn more about the workings of your balance sheet and how it can help improve financial management.

Create your balance sheet easily by downloading our Balance Sheet Template , and check out our full guide to write your financial plan.

Trevor is the CFO of Palo Alto Software, where he is responsible for leading the company’s accounting and finance efforts.

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What is a balance sheet and why is it important?

Cnbc select talks about what a balance sheet is and it's utility as a financial statement.

A balance sheet is a versatile document that offers a snapshot of a company's or individual's finances at a given point in time. Businesses can use balance sheets to develop plans for the future and present a picture of their financial health to investors or other outside entities. You can also generate a personal balance sheet to get a concise view of your assets and liabilities. Here, CNBC Select explains what a balance sheet is, how to create one and how it can be useful to both companies and individuals.

What we'll cover

What is a balance sheet.

• How a balance sheet works

Why balance sheets are important

How to make a personal balance sheet, bottom line.

A balance sheet, also known as a statement of net worth , is a summary of a company's financial status at a specific point in time. It presents all assets and liabilities, as well as any investments from shareholders. It is one of the three primary financial statements all companies are required to have by law, along with an income statement and a statement of cash flows.

Because it uses archival data, a balance sheet only presents a snapshot of a company's financial situation. While it's a critical tool, it can't guarantee future performance.

How does a balance sheet work?

A balance sheet uses a formula that equates a company's assets with its liabilities plus its shareholder equity. The equation should always be in "balance," with the two sides equal. Here's what each aspect of the balance sheet equation represents:

• Assets: Assets are resources with quantifiable value, such as cash, inventory or money the company is owed. They are often split into current assets — bank accounts, inventory and other things that could easily be converted into cash — and fixed assets — buildings, machinery, long-term loans to customers and other things that will stay on the books longer. (Intellectual property can also be included as a fixed asset.)
• Liabilities: Essentially the opposite of an asset, a liability is something the company owes, usually a sum of money. They are divided into short-term liabilities — like salaries, rent and money owed to other companies — and long-term liabilities , like mortgages, larger loans and long-term leases.
• Shareholder equity: This is a company's net worth — essentially what would be left if the business had to liquidate its assets and pay off all its debts. It most commonly takes the form of stocks and retained earnings (money the company earned but hasn't distributed to investors), but also includes any capital investments. Analysts and investors can use shareholder equity to judge a company's financial well-being.

While there can be nuances regarding the classification of certain assets or liabilities, a balance sheet is still a good way to determine a company's financial health at a given point in time.

In a corporation, a balance sheet lets stakeholders know if the business is solvent, meaning the value of its assets is higher than the total of its liabilities. It can also pinpoint areas where the company is underperforming.

Externally, a balance sheet lets potential investors, clients and other businesses know if a company is solvent. Did it borrow more money than it should have? Are its liabilities higher than the industry average? Is the available cash on hand higher or lower than normal? While you'll most often hear about balance sheets in the context of business, they can also help individuals take stock of their finances and make informed purchasing and investing decisions.

You can also use a balance sheet to quickly determine several key financial measurements:

• The current ratio , the current assets divided by current liabilities, illustrates a company's ability to pay off debts over the next 12 months.
• A quick ratio indicates a company's ability to pay off debt right away. It's determined by dividing liquid assets (cash/cash equivalents + short-term investments + accounts receivable) by current liabilities. The quick ratio is often the same as the current ratio.
• There is also the debt-to-equity ratio , or "risk ratio." It's a company's total liabilities divided by its total equity. This metric reveals how much of a business is financed by debt. If a company is highly leveraged, it can make it hard to get additional financing.

The formula for a personal balance sheet is similar to one for a business, only without shareholder equity. Essentially, your net worth is equal to your assets minus your liabilities, or debts. To create a personal balance sheet, start by collecting relevant financial records from your bank, investment companies and creditors. Using a personal finance app, such as You Need A Budget (YNAB) , can be helpful during this kind of deep dive. YNAB syncs with your bank and investment accounts, allowing you to assign funds to different life categories to better help you visualize your finances.

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Now, tally up your assets. This includes money in checking accounts , savings accounts and retirement funds, as well as your car or home (if you own them outright) and valuables like jewelry, art or collectibles. Then work on identifying your liabilities, or outstanding debts. Common ones include mortgages, student loans, car payments and credit card bills.

Once you've listed both, subtract your liabilities from your assets. The resulting figure is your net worth. If the amount is lower than you would like, or even negative, remember that this is just a snapshot of your current status. You now have information that can help you address your financial situation.

For instance, if you see you've accumulated a substantial amount of credit card debt , you could consider applying for a balance transfer credit card like the Wells Fargo Reflect® Card , which has a 0% intro APR for 21 months from account opening on purchases and qualifying balance transfers. Balance transfers made within 120 days qualify for the intro rate, BT fee of 5%, min: $5. If you kept up with payments, you could chip away at your debt without being buried under a high interest rate.

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Who needs a balance sheet?

A balance sheet is a key financial tool for business owners, executives, analysts and anyone who wants a clear picture of a company's current monetary position.

What does a balance sheet show?

A balance sheet gives an overview of a company's financial position by taking stock of what it owns, what it owes and the value of its equity.

What doesn't appear on a balance sheet?

There are a few things a balance sheet won't show you, including cash flow, profits and losses and the fair market value of assets such as land.

Can a balance sheet be negative?

A balance sheet can contain negative values, most commonly when a business is spending more than it is making. But the basic formula — assets = liabilities + shareholders' equity — should always balance out.

Money matters — so make the most of it. Get expert tips, strategies, news and everything else you need to maximize your money, right to your inbox.  Sign up here .

Businesses use balance sheets to indicate their financial standing. They can also be used by individuals or households to get a high-level view of their current wealth and identify areas for improvement.

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At CNBC Select, our mission is to provide our readers with high-quality service journalism and comprehensive consumer advice so they can make informed decisions with their money. Every article is based on rigorous reporting by our team of expert writers and editors with extensive knowledge of financial products . While CNBC Select earns a commission from affiliate partners on many offers and links, we create all our content without input from our commercial team or any outside third parties, and we pride ourselves on our journalistic standards and ethics.

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What’s a Balance Sheet and Why Do I Need One?

Learn about balance sheets and how they differ from other financial statements.

Table of Contents

A balance sheet is an essential tool for business owners who must understand their assets, liabilities and owner’s equity and how these balances change from one accounting period to the next. This guide introduces you to the balance sheet and explains its importance to your business.

What is a balance sheet?

A balance sheet lists assets and liabilities and the difference between them (owner’s equity) at a specific time. The balance sheet helps you analyze your business’s financial health and net worth according to book value.

What does a balance sheet include?

A balance sheet includes the following:

• Assets the business owns, including real estate, vehicles, office equipment, accounts receivable (AR) and goodwill
• Short-term and long-term liabilities, such as accounts payable (AP) and loans
• Owner’s equity ― the difference between total assets and total liabilities

Here’s a look at each component.

There are two types of assets: current assets and noncurrent assets:

• Current assets: Current assets include cash or something easily converted into cash or used up within a year. Current assets include money in business bank accounts , AR, inventory, supplies and prepaid expenses that apply to the following operating cycle.
• Noncurrent assets: Noncurrent assets are not expected to be liquidated within a year. They have a longer lifespan than current assets and include tangible assets like machinery, computers, the building your business operates in and land. Noncurrent assets can also be intangible assets like patents, goodwill and copyrights; these assets are not physical but are essential elements of your business.

Liabilities

Business liabilities are financial obligations a company owes other entities. They are categorized into current and long-term liabilities:

• Current liabilities: Current liabilities include amounts that must be paid within one year, including AP, payroll, income tax liability or the short-term portion of long-term debt. 
• Long-term liabilities: Long-term liabilities refer to long-term debts and other financial obligations due after a period of more than one year.

Owner’s equity

The difference between total assets and total liabilities equals owner’s equity (or shareholder’s equity). If the business assets are greater than its liabilities, the owner’s equity is positive. If the liabilities exceed the assets, the owner’s equity is negative.

How does a balance sheet tie into other financial statements?

A balance sheet is one of three financial statements. The other statements are as follows:

• Income statement: An income statement shows income, expenses and profit or loss during a specific period.
• Cash flow statement: Cash flow statements show the cash generated and spent during a specific period. 

Consider balance sheets for the beginning and end of a financial period as snapshots in time. The income statement shows what happened during that time. The cash flow statement ties the balance sheets and the income statement together by showing how cash moved in and out of the business.

Why do I need a balance sheet?

A balance sheet is a snapshot of your business’s health at a specific time. You need balance sheets for the following reasons.

1. A balance sheet helps you manage your business.

You should compare balance sheets from the beginning and end of a specific period to see how the total amounts change. For example, your balance sheet tells you how your assets compare to your liabilities. If your short-term liabilities (amounts you must pay within the next financial period) are growing in proportion to your short-term assets, such as cash, you may have trouble meeting obligations in the near future.

2. Bankers, creditors and investors require balance sheets.

You’ll need to present financial statements, including balance sheets, to bankers and other outside parties. For example, if you apply for a business loan , the bank will expect to see your financial statements to determine your business’s financial health. 

3. You may need a balance sheet on your tax return. 

Unless you file taxes as a sole proprietor , you are required to have a balance sheet for tax purposes. This balance sheet may differ from the one you use for accounting purposes, for example, if you use a different accounting method for tax vs. book depreciation. 

4. A balance sheet helps you value your business.

If you ever want to sell the business, you should be able to say what the book value of your company is according to the balance sheet.  

However, business valuation is complex. Book value does not take into consideration future expectations for a company. For example, a company that is growing and making a profit should be worth more than the book value in a sale. Meanwhile, a business that is struggling or has recently received negative press may sell for less than the net book value, as shown on the balance sheet.

William Brigham, director of the New York State Small Business Development Center in Albany, New York, said a balance sheet is a good reality check when it comes to determining your business’s value. “Everybody thinks their business is worth more than it really is,” Brigham explained. 

Balance sheets are key business documents 

Balance sheets provide crucial visibility into the financial health of your business. They help you compare revenue and expenses side by side, tracking where your money comes in from and where it goes. Balance sheet insights can enable better decision-making, more accurate financial planning and improved forecasting for your business ― all of which can contribute to your success.

Adam Uzialko contributed to this article. Source interviews were conducted for a previous version of this article.

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What Is a Balance Sheet?

How balance sheets work, special considerations.

• Why Is It Important?
• Limitations
• Balance Sheet FAQs
• Corporate Finance
• Financial statements: Balance, income, cash flow, and equity

Balance Sheet: Explanation, Components, and Examples

What you need to know about these financial statements

• Valuing a Company: Business Valuation Defined With 6 Methods
• Valuation Analysis
• Financial Statements
• Balance Sheet CURRENT ARTICLE
• Cash Flow Statement
• 6 Basic Financial Ratios
• 5 Must-Have Metrics for Value Investors
• Earnings Per Share (EPS)
• Price-to-Earnings Ratio (P/E Ratio)
• Price-To-Book Ratio (P/B Ratio)
• Price/Earnings-to-Growth (PEG Ratio)
• Fundamental Analysis
• Absolute Value
• Relative Valuation
• Intrinsic Value of a Stock
• Intrinsic Value vs. Current Market Value
• Equity Valuation: The Comparables Approach
• 4 Basic Elements of Stock Value
• How to Become Your Own Stock Analyst
• Due Diligence in 10 Easy Steps
• Determining the Value of a Preferred Stock
• Qualitative Analysis
• Stock Valuation Methods
• Bottom-Up Investing
• Ratio Analysis
• What Book Value Means to Investors
• Liquidation Value
• Market Capitalization
• Discounted Cash Flow (DCF)
• Enterprise Value (EV)
• How to Use Enterprise Value to Compare Companies
• How to Analyze Corporate Profit Margins
• Return on Equity (ROE)
• Decoding DuPont Analysis
• How to Value Private Companies
• Valuing Startup Ventures

The term balance sheet refers to a financial statement that reports a company's assets, liabilities, and shareholder equity at a specific point in time. Balance sheets provide the basis for computing rates of return for investors and evaluating a company's capital structure .

In short, the balance sheet is a financial statement that provides a snapshot of what a company owns and owes, as well as the amount invested by shareholders. Balance sheets can be used with other important financial statements to conduct fundamental analysis or calculate financial ratios.

Key Takeaways

• A balance sheet is a financial statement that reports a company's assets, liabilities, and shareholder equity.
• The balance sheet is one of the three core financial statements that are used to evaluate a business.
• It provides a snapshot of a company's finances (what it owns and owes) as of the date of publication.
• The balance sheet adheres to an equation that equates assets with the sum of liabilities and shareholder equity.
• Fundamental analysts use balance sheets to calculate financial ratios.

Investopedia / Katie Kerpel

The balance sheet provides an overview of the state of a company's finances at a moment in time. It cannot give a sense of the trends playing out over a longer period on its own. For this reason, the balance sheet should be compared with those of previous periods.

Investors can get a sense of a company's financial well-being by using a number of ratios that can be derived from a balance sheet, including the debt-to-equity ratio and the acid-test ratio , along with many others. The income statement and statement of cash flows also provide valuable context for assessing a company's finances, as do any notes or addenda in an earnings report that might refer back to the balance sheet.

The balance sheet adheres to the following accounting equation, with assets on one side, and liabilities plus shareholder equity on the other, balance out:

Assets = Liabilities + Shareholders’ Equity \text{Assets} = \text{Liabilities} + \text{Shareholders' Equity} Assets = Liabilities + Shareholders’ Equity

This formula is intuitive. That's because a company has to pay for all the things it owns (assets) by either borrowing money (taking on liabilities) or taking it from investors (issuing shareholder equity).

If a company takes out a five-year, $4,000 loan from a bank, its assets (specifically, the cash account) will increase by $4,000. Its liabilities (specifically, the long-term debt account ) will also increase by $4,000, balancing the two sides of the equation. If the company takes $8,000 from investors, its assets will increase by that amount, as will its shareholder equity. All revenues the company generates in excess of its expenses will go into the shareholder equity account. These revenues will be balanced on the assets side, appearing as cash, investments, inventory, or other assets.

Balance sheets should also be compared with those of other businesses in the same industry since different industries have unique approaches to financing.

As noted above, you can find information about assets, liabilities, and shareholder equity on a company's balance sheet. The assets should always equal the liabilities and shareholder equity. This means that the balance sheet should always balance , hence the name. If they don't balance, there may be some problems, including incorrect or misplaced data, inventory or exchange rate errors, or miscalculations.

Each category consists of several smaller accounts that break down the specifics of a company's finances. These accounts vary widely by industry, and the same terms can have different implications depending on the nature of the business. Companies might choose to use a form of balance sheet known as the common size , which shows percentages along with the numerical values. This type of report allows for a quick comparison of items.

There are a few common components that investors are likely to come across.

 Theresa Chiechi {Copyright} Investopedia, 2019.

Components of a Balance Sheet

Accounts within this segment are listed from top to bottom in order of their liquidity . This is the ease with which they can be converted into cash. They are divided into current assets, which can be converted to cash in one year or less; and non-current or long-term assets, which cannot.

Here is the general order of accounts within current assets:

• Cash and cash equivalents are the most liquid assets and can include Treasury bills and short-term certificates of deposit, as well as hard currency.
• Marketable securities are equity and debt securities for which there is a liquid market.
• Accounts receivable (AR) refer to money that customers owe the company. This may include an allowance for doubtful accounts as some customers may not pay what they owe.
• Inventory refers to any goods available for sale, valued at the lower of the cost or market price.
• Prepaid expenses represent the value that has already been paid for, such as insurance, advertising contracts, or rent.

Long-term assets include the following:

• Long-term investments are securities that will not or cannot be liquidated in the next year.
• Fixed assets include land, machinery, equipment, buildings, and other durable, generally capital-intensive assets.
• Intangible assets include non-physical (but still valuable) assets such as intellectual property and goodwill. These assets are generally only listed on the balance sheet if they are acquired, rather than developed in-house. Their value may thus be wildly understated (by not including a globally recognized logo, for example) or just as wildly overstated.

Liabilities

A liability is any money that a company owes to outside parties, from bills it has to pay to suppliers to interest on bonds issued to creditors to rent, utilities and salaries. Current liabilities are due within one year and are listed in order of their due date. Long-term liabilities, on the other hand, are due at any point after one year.

Current liabilities accounts might include:

• Current portion of long-term debt is the portion of a long-term debt due within the next 12 months. For example, if a company has a 10 years left on a loan to pay for its warehouse, 1 year is a current liability and 9 years is a long-term liability.
• Interest payable is accumulated interest owed, often due as part of a past-due obligation such as late remittance on property taxes.
• Wages payable is salaries, wages, and benefits to employees, often for the most recent pay period.
• Customer prepayments is money received by a customer before the service has been provided or product delivered. The company has an obligation to (a) provide that good or service or (b) return the customer's money.
• Dividends payable is dividends that have been authorized for payment but have not yet been issued.
• Earned and unearned premiums is similar to prepayments in that a company has received money upfront, has not yet executed on their portion of an agreement, and must return unearned cash if they fail to execute.
• Accounts payable is often the most common current liability. Accounts payable is debt obligations on invoices processed as part of the operation of a business that are often due within 30 days of receipt.

Long-term liabilities can include:

• Long-term debt includes any interest and principal on bonds issued
• Pension fund liability refers to the money a company is required to pay into its employees' retirement accounts
• Deferred tax liability is the amount of taxes that accrued but will not be paid for another year. Besides timing, this figure reconciles differences between requirements for financial reporting and the way tax is assessed, such as depreciation calculations.

Some liabilities are considered off the balance sheet, meaning they do not appear on the balance sheet.

Shareholder Equity

Shareholder equity is the money attributable to the owners of a business or its shareholders. It is also known as net assets since it is equivalent to the total assets of a company minus its liabilities or the debt it owes to non-shareholders.

Retained earnings are the net earnings a company either reinvests in the business or uses to pay off debt. The remaining amount is distributed to shareholders in the form of dividends.

Treasury stock is the stock a company has repurchased. It can be sold at a later date to raise cash or reserved to repel a hostile takeover .

Some companies issue preferred stock , which will be listed separately from common stock under this section. Preferred stock is assigned an arbitrary par value (as is common stock, in some cases) that has no bearing on the market value of the shares. The common stock and preferred stock accounts are calculated by multiplying the par value by the number of shares issued.

Additional paid-in capital or capital surplus represents the amount shareholders have invested in excess of the common or preferred stock accounts, which are based on par value rather than market price. Shareholder equity is not directly related to a company's market capitalization . The latter is based on the current price of a stock, while paid-in capital is the sum of the equity that has been purchased at any price.

Par value is often just a very small amount, such as $0.01.

Importance of a Balance Sheet

Regardless of the size of a company or industry in which it operates, there are many benefits of reading, analyzing, and understanding its balance sheet.

First, balance sheets help to determine risk. This financial statement lists everything a company owns and all of its debt. A company will be able to quickly assess whether it has borrowed too much money, whether the assets it owns are not liquid enough, or whether it has enough cash on hand to meet current demands.

Balance sheets are also used to secure capital. A company usually must provide a balance sheet to a lender in order to secure a business loan. A company must also usually provide a balance sheet to private investors when attempting to secure private equity funding. In both cases, the external party wants to assess the financial health of a company, the creditworthiness of the business, and whether the company will be able to repay its short-term debts.

Managers can opt to use financial ratios to measure the liquidity, profitability, solvency, and cadence (turnover) of a company using financial ratios, and some financial ratios need numbers taken from the balance sheet. When analyzed over time or comparatively against competing companies, managers can better understand ways to improve the financial health of a company.

Last, balance sheets can lure and retain talent. Employees usually prefer knowing their jobs are secure and that the company they are working for is in good health. For public companies that must disclose their balance sheet, this requirement gives employees a chance to review how much cash the company has on hand, whether the company is making smart decisions when managing debt, and whether they feel the company's financial health is in line with what they expect from their employer.

Limitations of a Balance Sheet

Although the balance sheet is an invaluable piece of information for investors and analysts, there are some drawbacks. Because it is static, many financial ratios draw on data included in both the balance sheet and the more dynamic income statement and statement of cash flows to paint a fuller picture of what's going on with a company's business. For this reason, a balance alone may not paint the full picture of a company's financial health.

A balance sheet is limited due its narrow scope of timing. The financial statement only captures the financial position of a company on a specific day. Looking at a single balance sheet by itself may make it difficult to extract whether a company is performing well. For example, imagine a company reports $1,000,000 of cash on hand at the end of the month. Without context, a comparative point, knowledge of its previous cash balance, and an understanding of industry operating demands, knowing how much cash on hand a company has yields limited value.

Different accounting systems and ways of dealing with depreciation and inventories will also change the figures posted to a balance sheet. Because of this, managers have some ability to game the numbers to look more favorable. Pay attention to the balance sheet's footnotes in order to determine which systems are being used in their accounting and to look out for red flags .

Last, a balance sheet is subject to several areas of professional judgement that may materially impact the report. For example, accounts receivable must be continually assessed for impairment and adjusted to reflect potential uncollectible accounts. Without knowing which receivables a company is likely to actually receive, a company must make estimates and reflect their best guess as part of the balance sheet.

Example of a Balance Sheet

The image below is an example of a comparative balance sheet of Apple, Inc . This balance sheet compares the financial position of the company as of September 2020 to the financial position of the company from the year prior.

In this example, Apple's total assets of $323.8 billion is segregated towards the top of the report. This asset section is broken into current assets and non-current assets, and each of these categories is broken into more specific accounts. A brief review of Apple's assets shows that their cash on hand decreased, yet their non-current assets increased.

This balance sheet also reports Apple's liabilities and equity, each with its own section in the lower half of the report. The liabilities section is broken out similarly as the assets section, with current liabilities and non-current liabilities reporting balances by account. The total shareholder's equity section reports common stock value, retained earnings, and accumulated other comprehensive income. Apple's total liabilities increased, total equity decreased, and the combination of the two reconcile to the company's total assets.

Why Is a Balance Sheet Important?

The balance sheet is an essential tool used by executives, investors, analysts, and regulators to understand the current financial health of a business. It is generally used alongside the two other types of financial statements: the income statement and the cash flow statement.

Balance sheets allow the user to get an at-a-glance view of the assets and liabilities of the company. The balance sheet can help users answer questions such as whether the company has a positive net worth, whether it has enough cash and short-term assets to cover its obligations, and whether the company is highly indebted relative to its peers.

What Is Included in the Balance Sheet?

The balance sheet includes information about a company’s assets and liabilities. Depending on the company, this might include short-term assets, such as cash and accounts receivable , or long-term assets such as property, plant, and equipment (PP&E). Likewise, its liabilities may include short-term obligations such as accounts payable and wages payable, or long-term liabilities such as bank loans and other debt obligations.

Who Prepares the Balance Sheet?

Depending on the company, different parties may be responsible for preparing the balance sheet. For small privately-held businesses , the balance sheet might be prepared by the owner or by a company bookkeeper. For mid-size private firms, they might be prepared internally and then looked over by an external accountant.

Public companies, on the other hand, are required to obtain external audits by public accountants, and must also ensure that their books are kept to a much higher standard. The balance sheets and other financial statements of these companies must be prepared in accordance with Generally Accepted Accounting Principles (GAAP) and must be filed regularly with the Securities and Exchange Commission (SEC) .

What Are the Uses of a Balance Sheet?

A balance sheet explains the financial position of a company at a specific point in time. As opposed to an income statement which reports financial information over a period of time, a balance sheet is used to determine the health of a company on a specific day.

A bank statement is often used by parties outside of a company to gauge the company's health. Banks, lenders, and other institutions may calculate financial ratios off of the balance sheet balances to gauge how much risk a company carries, how liquid its assets are, and how likely the company will remain solvent.

A company can use its balance sheet to craft internal decisions, though the information presented is usually not as helpful as an income statement. A company may look at its balance sheet to measure risk, make sure it has enough cash on hand, and evaluate how it wants to raise more capital (through debt or equity).

What Is the Balance Sheet Formula?

In accounting, the footing is the final balance obtained by adding all the debits and credits. A balance sheet, an important financial tool, calculates a company's assets with its liabilities and equity. Total assets are calculated as the sum of all short-term, long-term, and other assets. Total liabilities are calculated as the sum of all short-term, long-term, and other liabilities. Total equity is calculated as the sum of net income, retained earnings, owner contributions, and shares of stock issued. The formula is: total assets = total liabilities + total equity.

Apple Investor Relations. " Condensed Consolidated Balance Sheets (Unaudited), FY 2020 Q4 ." Page 2.

PwC. " US Financial Statement Presentation Guide: 1.1 Financial Statement Presentation and Disclosure Requirements ."

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How to Read & Understand a Balance Sheet

• 02 Apr 2020

When it comes to understanding a business, there are few financial statements more important than the balance sheet. The balance sheet offers critical insight into the health of a business that can be used by:

• Potential investors to decide whether to invest in a company
• Business owners to craft more effective organizational strategy
• Employees to adjust their processes to better reach shared organizational goals

Whether you’re a business owner, employee, or investor , understanding how to read and understand the information in a balance sheet is an essential financial accounting skill to have.

Here’s everything you need to know about understanding a balance sheet, including what it is, the information it contains, why it’s so important, and the underlying mechanics of how it works.

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What Is a Balance Sheet?

A balance sheet is a financial document designed to communicate exactly how much a company or organization is worth—its so-called “book value.” The balance sheet achieves this by listing out and tallying up all of a company’s assets, liabilities, and owners’ equity as of a particular date, also known as the “reporting date."

Typically, a balance sheet will be prepared and distributed on a quarterly or monthly basis, depending on the frequency of reporting as determined by law or company policy.

Check out our video on the balance sheet below, and subscribe to our YouTube channel for more explainer content!

The Purpose of the Balance Sheet

A balance sheet provides a summary of a business at a given point in time. It’s a snapshot of a company’s financial position, as broken down into assets, liabilities, and equity. Balance sheets serve two very different purposes depending on the audience reviewing them.

When a balance sheet is reviewed internally by a business leader, key stakeholder, or employee, it’s designed to give insight into whether a company is succeeding or failing. Based on this information, an internal audience can shift their policies and approach: doubling down on successes, correcting failures, and pivoting toward new opportunities.

When a balance sheet is reviewed externally by someone interested in a company, it’s designed to give insight into what resources are available to a business and how they were financed. Based on this information, potential investors can decide whether it would be wise to invest in a company. Similarly, it’s possible to leverage the information in a balance sheet to calculate important metrics, such as liquidity, profitability, and debt-to-equity ratio.

External auditors, on the other hand, might use a balance sheet to ensure a company is complying with any reporting laws it’s subject to.

It’s important to remember that a balance sheet communicates information as of a specific date. By its very nature, a balance sheet is always based upon past data. While investors and stakeholders may use a balance sheet to predict future performance, past performance is no guarantee of future results.

The Balance Sheet Equation

The information found in a balance sheet will most often be organized according to the following equation: Assets = Liabilities + Owners’ Equity .

While this equation is the most common formula for balance sheets, it isn’t the only way of organizing the information. Here are other equations you may encounter:

Owners’ Equity = Assets - Liabilities

Liabilities = Assets - Owners’ Equity

A balance sheet should always balance . Assets must always equal liabilities plus owners’ equity. Owners’ equity must always equal assets minus liabilities. Liabilities must always equal assets minus owners’ equity.

If a balance sheet doesn’t balance, it’s likely the document was prepared incorrectly. Typically, errors are due to incomplete or missing data, incorrectly entered transactions, errors in currency exchange rates or inventory levels, miscalculations of equity, or miscalculated depreciation or amortization.

Here’s a closer look at what's typically included in each of those categories of value: assets, liabilities, and owners’ equity.

An asset is defined as anything that is owned by a company and holds inherent, quantifiable value. A business could, if necessary, convert an asset into cash through a process known as liquidation. Assets are typically tallied as positives (+) in a balance sheet and broken down into two further categories: current assets and noncurrent assets.

Current assets typically include anything a company expects it will convert into cash within a year, such as:

• Cash and cash equivalents
• Prepaid expenses
• Marketable securities
• Accounts receivable

Noncurrent assets typically include long-term investments that aren’t expected to be converted into cash in the short term, such as:

• Intellectual property
• Equipment used to produce goods or perform services

Because companies invest in assets to fulfill their mission, you must develop an intuitive understanding of what they are. Without this knowledge, it can be challenging to understand the balance sheet and other financial documents that speak to a company’s health.

Related: Financial Statement Analysis: The Basics for Non-Accountants

2. Liabilities

A liability is the opposite of an asset. While an asset is something a company owns, a liability is something it owes . Liabilities are financial and legal obligations to pay an amount of money to a debtor, which is why they’re typically tallied as negatives (-) in a balance sheet.

Just as assets are categorized as current or noncurrent, liabilities are categorized as current liabilities or noncurrent liabilities.

Current liabilities typically refer to any liability due to the debtor within one year, which may include:

• Payroll expenses
• Rent payments
• Utility payments
• Debt financing
• Accounts payable
• Other accrued expenses

Noncurrent liabilities typically refer to any long-term obligations or debts which will not be due within one year, which might include:

• Bonds payable
• Provisions for pensions
• Deferred tax liabilities

Liabilities may also include an obligation to provide goods or services in the future.

3. Owners’ Equity

Owners’ equity , also known as shareholders' equity , typically refers to anything that belongs to the owners of a business after any liabilities are accounted for.

If you were to add up all of the resources a business owns (the assets) and subtract all of the claims from third parties (the liabilities), the residual leftover is the owners’ equity.

Owners’ equity typically includes two key elements. The first is money , which is contributed to the business in the form of an investment in exchange for some degree of ownership (typically represented by shares). The second is earnings that the company generates over time and retains.

A Balance Sheet Example

By looking at the sample balance sheet below, you can extract vital information about the health of the company being reported on.

For example, this balance sheet tells you:

• The reporting period ends November 30, 2018, and compares against a similar reporting period from the year prior
• The company’s assets total $60,173, including $37,232 in current assets and $22,941 in noncurrent assets
• The company’s liabilities total $16,338, including $14,010 in current liabilities and $2,328 in noncurrent liabilities
• The company retained $45,528 in earnings during the reporting period, slightly more than the same period a year prior

It's important to note that how a balance sheet is formatted differs depending on where an organization is based. The example above complies with International Financial Reporting Standards (IFRS), which companies outside the United States follow. In this balance sheet, accounts are listed from least liquid to most liquid (or how quickly they can be converted into cash).

If this balance sheet were from a US company, it would adhere to Generally Accepted Accounting Principles (GAAP), and the order of accounts would be reversed (most liquid to least liquid).

Related: GAAP vs. IFRS: What Are the Key Differences and Which Should You Use?

A Crucial Understanding

The information found in a company’s balance sheet is among some of the most important for a business leader, regulator, or potential investor to understand. Without this knowledge, it can be challenging to know whether a company is struggling or thriving, highlighting why learning how to read and understand a balance sheet is a crucial skill for anyone interested in business.

Do you want to take your career to the next level? Explore our online finance and accounting courses , which can teach you the key financial concepts you need to understand business performance and potential. To get a jumpstart on building your financial literacy, download our free Financial Terms Cheat Sheet .

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Balance Sheets: What Are They and Why Do They Matter For Business Owners?

Business owners need to become familiar with a wide range of documents to keep their finances in order and protect their bottom line. One of the most important documents a business owner will need to use on a regular basis is that of a balance sheet.

With a better understanding of what a balance sheet is, what it entails and how to create one, business owners can get a better handle on their finances and make informed decisions.

What Is a Balance Sheet?

Specifically, a balance sheet is a document that is meant to give business owners, accountants and even investors/creditors a better idea about a company’s financial health at any given time. Most businesses produce a balance sheet on a quarterly basis as a means of keeping tabs on their progress and growth throughout the year, whereas others may create balance sheets monthly for even more accurate reporting.

More specifically, a balance sheet provides a depiction of a company’s assets, net worth and liabilities at any point in time.

The Importance of Balance Sheets in Business

Maintaining balance sheets is an important part of running a successful business, regardless of the size or scope of the company itself. This is because balance sheets are one of the most reliable ways to gain real-time insights into the financial health of a business. This can be useful to business owners who are looking to make informed decisions, as well as accountants and even financial advisors who need to provide sound advice to business owners.

Likewise, many investors and creditors will ask for a copy of a company’s latest balance sheet (or the past year’s worth of balance sheets) to get a better feel for the company’s overall finances. The information found on a balance sheet could be the difference between the business receiving funding or not. Meanwhile, if a business doesn’t have a history of maintaining balance sheets, this could demonstrate a lack of professionalism that could turn away a potential investor.

Components of a Balance Sheet

There are three main components that should generally be found on any balance sheet, including:

• Assets  – This refers to any part of the business that generates or represents income, such as cash-on-hand, short-term investments, accounts receivable and inventory.
• Liabilities  – This refers to anything a business owes to another person, bank or company. Examples may include short-term loans that need to be paid off, money due to vendors for goods/services and the like.
• Equity  – This refers to any claims a business owner may have to assets after liabilities have been paid, such as property contributed to the business.

How to Create a Balance Sheet

All business owners should be able to create a balance sheet. The first step is to determine the reporting date and period for the balance sheet itself; generally, the reporting date of a balance sheet is the final day of the quarter or accounting period for the business.

The next step is to identify assets, including current and non-current assets, for proper reporting. These should be listed separately on the sheet but totaled together at the bottom. The same goes for the section on liabilities, with current and non-current liabilities listed and totaled as needed.

Next, shareholder or owner equity should be totaled and added to the report, including any share capital and reserves or retained earnings that may apply.

When to Get Help with Balance Sheets

While balance sheets are a very basic part of financial reporting for a business, they can take some getting used to for new business owners. This is why many business owners hire accountants or other financial experts to assist with this part of running the business. An experienced professional will be able to create and maintain balance sheets that are in-line with International Financial Reporting Standards (IFRS)  and that follow  Generally Accepted Accounting Principles (GAAP) .

Likewise, follow-up with an accountant or financial professional may be needed if a balance sheet  doesn’t  balance. If this is the case, there may be incomplete data, errors in inventory or bad calculations causing the issue. Either way, the problem will need to be addressed.

The Bottom Line on Business Balance Sheets

Overall, balance sheets are one of the most critical types of financial reports that a business can put out. Most businesses should aim to create balance sheets at least once a quarter (and this is required for companies that are publicly traded)—but in some cases, more frequent reporting may be recommended.

Regardless, knowing how to create a balance sheet is an important part of running a business. Business owners who need further assistance can benefit from working with an experienced accountant or financial advisor to walk them through the process and gain confidence with this important task.

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The experts at Corrigan Krause are ready to help keep your business up to date and on course.  Click here to learn more about becoming a client .

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It's important business owners and accountants understand how to read and interpret balance sheets. These documents offer a quick view of a business's financial standing.

Do you gloss over the balance sheet in your business financial statements? Not sure what the numbers are telling you?

You are definitely not alone.

But that means you’re also missing out on seeing the big picture:

• the net worth of your business
• how much money you have
• where that money is kept

Understanding how to read a balance sheet is essential in managing cash flow in a small business.

In this article, we guide you through the basic terms plus how to read the statement as a whole, and how to read a balance sheet easily, so you can gain valuable insights into your business.

Here’s what we’ll cover

What is a balance sheet and why is it important, the sections of the balance sheet, what are assets, what are liabilities.

• What is shareholders’ equity?

How to read the balance sheet

Balance sheet versus cash flow statement versus profit and loss account, final thoughts.

It’s one of the 3 core financial statements to help you manage business cash flow.

The balance sheet provides an overview of the state of your business finances at a specific point in time, also known as the reporting date.

It’s generally used alongside the other two types of financial statements:

• the profit and loss account (also known as the profit and loss statement or income statement)
• the cash flow statement

Because the balance sheet reflects every transaction since your business started, it reveals your business’s overall financial health.

It tells you exactly what your business owns and is owed, as well as the amount you as an owner have invested.

But what it can’t do is give you a sense of the trends playing out over a longer period on its own.

For this reason, you will need to compare your latest balance sheet to previous ones to examine how your finances have changed over time.

Then you’ll be able to see how far your business has come since day one and whether you’ve been successfully managing cash flow.

The balance sheet is made up of 3 parts:

• Liabilities
• Shareholders’ equity

The way they are shown on the statement is based on the fundamental accounting equation:

Assets = liabilities + equity

The statement must always balance, hence the name.

That’s because your business has to pay for all the things it owns (assets) by either borrowing money (taking on liabilities) or taking it from you, the owner (issuing shareholder equity).

Let’s look into each section of the balance sheet in more detail.

Assets represent the use of funds.

They are all the things of value that are owned by your business or due to your business.

The business will use cash or other funds provided by either a creditor or investor to acquire assets.

Assets on the balance sheet are listed from top to bottom in order of their liquidity. This is the ease with which you can convert them into cash.

You’ll notice they’re also divided between current assets, fixed assets, and intangibles.

Current assets are those that can be converted into cash in less than one year. These include cash in the bank, trade accounts receivable, prepaid expenses, and inventory.

Non-current assets are made up of  fixed assets  and intangibles.

Fixed assets represent the use of cash to purchase assets whose life exceeds one year, such as land, buildings, machinery and equipment, furniture and fixtures, and leasehold improvements.

Intangibles are assets with an undetermined life that may never be converted into cash.

Therefore, for most analysis purposes, intangibles are ignored as assets and are deducted from equity because their value is difficult to determine.

Intangibles consist of assets such as research and development, patents, market research, and goodwill.

Intangibles are similar to prepaid expenses because you’re purchasing a benefit that will be expensed at a later date.

Liabilities represent sources of cash or its equivalent invested into the business by lenders.

Lenders generally consist of trade suppliers, employees, tax authorities, and financial institutions.

This source of funds enables your business to continue or expand operations.

Liabilities on the balance sheet are split between current liabilities and long-term liabilities.

Current liabilities are obligations that will mature and must be paid within 12 months. They are listed in order of their due date.

These include trade accounts payable, accrued expenses, and current portions of long-term debt.

Long-term liabilities are those obligations that will be payable in the following year(s). This includes the non-current portion of long-term debt and loans payable to owners.

What is shareholders’ equity?

This section represents the owners’ share in the financing of all the assets.

If you add up all of the resources your business owns (the assets) and subtract all of the claims from third parties (the liabilities), the residual leftover is the shareholders’ equity.

This section typically includes two key elements.

The first is money contributed to the business. This comes in the form of an investment in exchange for a degree of ownership, typically represented by shares.

The second is earnings that your business generates over time and retains.

Before delving into the information on your balance sheet, you first need to ensure that it is in balance.

Does the value of your total assets equal the combined value of liabilities and equity?

If they don’t balance, you’ll need to look into the problem.

There may be incorrect or misplaced data, inventory level errors, or exchange rate miscalculations.

Overall, a positive bottom line means there’s value in the company for you as the owner.

A negative balance sheet means there have been more liabilities than assets. There’s no value in the company available to you at that point in time.

Your business can have made a profit for a particular financial year and still have a negative balance sheet if there have been a series of losses in the years prior.

When reviewing your assets, it’s helpful to see the spread between current and non-current.

Are your assets evenly spread or is all the money tied up in fixed assets, for example?

The distribution of your assets can help you identify potential  cash flow  issues.

When reviewing liabilities, again take a look at the distribution of current versus long-term liabilities for insights into your cash flow.

If you’ve lent money to the company then its largest creditor could well be the shareholder’s loan account.

Another way to extract information contained in the balance sheet is with financial ratio analysis.

The main types of ratios that use the balance sheet are financial strength ratios and activity ratios.

Just be aware that some ratios will need information from more than 1 financial statement.

Financial strength ratios provide information on how well your business can meet its obligations.

For example, the debt-to-equity ratio (calculated as  total liabilities / total shareholders’ equity ) is a metric that shows the ability of your business to pay for its debts with equity, if the need should arise.

The current ratio ( current assets / current liabilities ) will tell you whether you have the ability to pay all your debts in the next 12 months.

Activity ratios focus mainly on current assets to show how well your business manages its operating cycle. This includes receivables, inventory, and payables.

These ratios can provide insight into your operational efficiency.

The balance sheet shows a snapshot of your assets and liabilities at a specific point in time.

But you’ll notice it doesn’t show the amount of cash that was spent, nor the profit or revenue generated.

This is because the balance sheet doesn’t show your actual financial activity across a period of time.

It only shows the results of what your business owns, and owes, as a result of that activity.

This is why, to get an overall picture of its performance, you’ll need to look across all three financial statements.

The profit and loss account will summarize your business revenues, costs, and expenses. This helps you to understand if you were profitable.

The cash flow statement helps you to understand how much cash came in and out of the business during that time and where it was spent.

This statement doesn’t show your business’s financial health as much as give you ideas about where the money is going and potentially how you can budget differently.

The balance sheet, while only a part of the financial picture, is integral for managing cash flow, understanding how your business is funded, and the value of assets it holds.

Start becoming familiar with the information contained in the balance sheet, and it will unlock plenty of insights into

Editor’s note: This article was originally published in March 2023 and has been updated for relevance.

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Balance Sheet

Written by True Tamplin, BSc, CEPF®

Reviewed by subject matter experts.

Updated on March 17, 2023

Get Any Financial Question Answered

Table of contents, what is a balance sheet.

A balance sheet is a financial statement that shows the relationship between assets , liabilities , and shareholders’ equity of a company at a specific point in time.

Measuring a company’s net worth, a balance sheet shows what a company owns and how these assets are financed, either through debt or equity .

Balance sheets are useful tools for individual and institutional investors, as well as key stakeholders within an organization, as they show the general financial status of the company.

It is also possible to grasp the information found in a balance sheet to calculate important company metrics, such as profitability, liquidity, and debt-to-equity ratio.

However, it is crucial to remember that balance sheets communicate information as of a specific date. Naturally, a balance sheet is always based upon past data.

While stakeholders and investors may use a balance sheet to predict future performance, past performance does not guarantee future results.

In order to see the direction of a company, you will need to look at balance sheets over a time period of months or years.

How Balance Sheets Work

A balance sheet is guided by the accounting equation:

Both parts should be equal to each other or balance each other out. This means that the assets of a company should equal its liabilities plus any shareholders’ equity that has been issued. Hence, a balance sheet should always balance.

For instance, if a company takes out a ten-year, $8,000 loan from a bank, the assets of the company will increase by $8,000. Its liabilities will also increase by $8,000, balancing the two sides of the accounting equation .

If the company takes $10,000 from its investors, its assets and stockholders’ equity will also increase by that amount.

The revenues of the company in excess of its expenses will go into the shareholder equity account.

These revenues will be balanced on the asset side of the equation, appearing as inventory, cash , investments , or other assets.

Components of a Balance Sheet

A balance sheet has three primary components: assets, liabilities, and shareholders’ equity.

Assets are anything the company owns that holds some quantifiable value, which means that they could be liquidated and turned into cash.

These can include cash, investments, and tangible objects.

Companies divide their assets into two categories: current assets and noncurrent (long-term) assets.

Current Assets

Current assets are typically those that a company expects to convert easily into cash within a year.

These assets include cash and cash equivalents, prepaid expenses, accounts receivable, marketable securities, and inventory.

Non-Current Assets

Noncurrent assets are long-term investments that the company does not expect to convert into cash within a year or have a lifespan of more than one year.

Noncurrent assets include tangible assets , such as land, buildings, machinery, and equipment.

They can also be intangible assets, such as trademarks, patents, goodwill, copyright , or intellectual property.

Liabilities

Liabilities are anything a company owes. These are loans, accounts payable, bonds payable, or taxes.

Like assets, liabilities can be classified as either current or noncurrent liabilities.

Current Liabilities

Current liabilities refer to the liabilities of the company that are due or must be paid within one year.

This may include accounts payables, rent and utility payments, current debts or notes payables, current portion of long-term debt, and other accrued expenses.

Noncurrent Liabilities

Noncurrent or long-term liabilities are debts and other non-debt financial obligations that a company does not expect to repay within one year from the date of the balance sheet.

This may include long-term loans, bonds payable, leases, and deferred tax liabilities.

Shareholder’s Equity

Shareholder’s equity is the net worth of the company and reflects the amount of money left over if all liabilities are paid, and all assets are sold.

Shareholders’ equity belongs to the shareholders, whether public or private owners.

Retained Earnings

Shareholders’ equity reflects how much a company has left after paying its liabilities.

If the company wanted to, it could pay out all of that money to its shareholders through dividends . However, the company typically reinvests the money into the company.

Retained earnings are the money that the company keeps.

Share Capital

Share capital is the value of what investors have invested in the company.

For instance, if someone invests $200,000 to help you start a company, you would count that $200,000 in your balance sheet as your cash assets and as part of your share capital.

Stocks can be common or preferred stocks .

Common stock is those that people get when they buy stock through the stock market . Preferred stock, on the other hand, provides the shareholder with a greater claim on the company’s assets and earnings.

You can also see treasury stock on a balance sheet. This stock is a previously outstanding stock that is purchased from stockholders by the issuing company.

Example of a Balance Sheet

Below is an example of a balance sheet of Tesla for 2021 taken from the U.S. Securities and Exchange Commission .

As you can see, it starts with current assets, then the noncurrent, and the total of both.

Below the assets are the liabilities and stockholders’ equity, which include current liabilities, noncurrent liabilities, and shareholders’ equity.

For example, this balance sheet tells you:

• The reporting period ends December 31, 2021, and compares against a similar reporting period from the year prior.
• The assets of the company total $62,131, including $27,100 in current assets and $35,031 in noncurrent assets.
• The liabilities of the company total $30,548, including $19,705 in current liabilities and $10,843 in noncurrent liabilities.
• The company retained $331 in earnings during the reporting period, greatly less than the same period a year prior.
• Adhering to the accounting equation, a balance is obtained by the total assets of $62,131 and the combined total liabilities and stockholders’ equity which is $62,131.

It is crucial to note that how a balance sheet is formatted differs depending on where the company or organization is based.

How to Prepare a Balance Sheet

The balance sheet is prepared using the following steps:

Step 1: Determine the Reporting Date and Period

The balance sheet previews the total assets, liabilities, and shareholders’ equity of a company on a specific date, referred to as the reporting date.

Often, the reporting date will be the final day of the reporting period. Companies that report annually, like Tesla, often use December 31st as their reporting date, though they can choose any date.

There are also companies, like publicly traded ones, that will report quarterly. For this case, the reporting date will usually fall on the last day of the quarter:

• Q1: March 31
• Q2: June 30
• Q3: September 30
• Q4: December 31

However, it is common for a balance sheet to take a few days or weeks to prepare after the reporting period has ended.

Step 2: Identify Your Assets

You will need to tally up all your assets of the company on the balance sheet as of that date. This will include both current and noncurrent assets.

Assets are typically listed as individual line items and then as total assets in a balance sheet.

This will make it easier for analysts to comprehend exactly what your assets are and where they came from. Tallying the assets together will be required for final analysis.

Step 3: Identify Your Liabilities

Like assets, you need to identify your liabilities which will include both current and long-term liabilities.

Again, these should be organized into both line items and total liabilities. They should also be both subtotaled and then totaled together.

Step 4: Calculate Shareholders’ Equity

After you have assets and liabilities, calculating shareholders’ equity is done by taking the total value of assets and subtracting the total value of liabilities.

Shareholders’ equity will be straightforward for companies or organizations that a single owner privately holds.

The calculation may be complicated for publicly held companies depending on the various types of stock issued.

Line items in this section include common stocks, preferred stocks, share capital, treasury stocks, and retained earnings.

Step 5: Add Total Liabilities to Total Shareholders’ Equity and Compare to Assets

Adding total liabilities to shareholders’ equity should give you the same sum as your assets. If not, then there may be an error in your calculations.

Causes of a balance sheet not truly balancing may be:

• Errors in inventory
• Incorrectly entered transactions
• Incomplete or misplaced data
• Miscalculated loan amortization or depreciation
• Errors in currency exchange rates
• Miscalculated equity calculations

How to Analyze a Balance Sheet

Financial ratio analysis is the main technique to analyze the information contained within a balance sheet.

It uses formulas to obtain insights into a company and its operations.

Using financial ratios in analyzing a balance sheet, like the debt-to-equity ratio, can produce a good sense of the financial condition of the company and its operational efficiency.

It is crucial to remember that some ratios will require information from more than one financial statement, such as from the income statement and the balance sheet.

There are two types of ratios that use data from a balance sheet. These are:

Financial Strength Ratios

Financial strength ratios can provide investors with ideas of how financially stable the company is and whether it finances itself.

It also yields information on how well a company can meet its obligations and how these obligations are leveraged.

Financial strength ratios can include the working capital and debt-to-equity ratios.

Activity Ratios

Activity ratios mainly focus on current accounts to reveal how well the company manages its operating cycle .

These operating cycles can include receivables, payables, and inventory.

Examples of activity ratios are inventory turnover ratio, total assets turnover ratio, fixed assets turnover ratio, and accounts receivables turnover ratio.

These ratios can yield insights into the operational efficiency of the company.

Importance of a Balance Sheet

There are a few key reasons why a balance sheet is important. Here are a few of them:

Balance Sheets Examine Risk

A balance sheet lists all assets and liabilities of a company.

With this information, a company can quickly assess whether it has borrowed a large amount of money, whether the assets are not liquid enough, or whether it has enough current cash to fulfill current demands.

Balance Sheets Secure Capital

A lender will usually require a balance sheet of the company in order to secure a business plan.

Additionally, a company must usually provide a balance sheet to private investors when planning to secure private equity funding.

These are some of the cases in which external parties want to assess and check a company’s financial stability and health, its creditworthiness, and whether the company will be able to settle its short-term debts.

Balance Sheets are Needed for Financial Ratios

Business owners use these financial ratios to assess the profitability, solvency, liquidity , and turnover of a company and establish ways to improve the financial health of the company.

Some financial ratios need data and information from the balance sheet.

Balance Sheets Lure and Retain Talents

Good and talented employees are always looking for stable and secure companies to work in.

Balance sheets that are disclosed from public companies allow employees a chance to review how much the company has on hand and whether the financial health of the company is in accordance with their expectations from their employers.

Limitations of a Balance Sheet

Although balance sheets are important financial statements, they do have their limitations. Here are some of them:

Balance Sheets are Static

It may not provide a full snapshot of the financial health of a company without data from other financial statements.

In order to get a complete understanding of the company, business owners and investors should review other financial statements, such as the income statement and cash flow statement.

Balance Sheets Have a Narrow Scope of Timing

The balance sheet only reports the financial position of a company at a specific point in time.

This may not provide an accurate portrayal of the financial health of a company if the market conditions rapidly change or without knowledge of previous cash balance and understanding of industry operating demands.

Balance Sheets May Be Susceptible to Errors and Fraud

The data and information included in a balance sheet can sometimes be manipulated by management in order to present a more favorable financial position for the company.

Businesses should be wary of companies that have large discrepancies between their balance sheets and other financial statements.

It is also helpful to pay attention to the footnotes in the balance sheets to check what accounting systems are being used and to look out for red flags.

Balance Sheets Are Subject to Several Professional Judgment Areas That Could Impact the Report

For instance, accounts receivable should be continually assessed for impairment and adjusted to reveal potential uncollectible accounts.

A company should make estimates and reflect their best guess as a part of the balance sheet if they do not know which receivables a company is likely actually to receive.

Balance Sheets vs. Income Statements

Here are some key differences between balance sheets and income statements:

The Bottom Line

Balance sheets are important financial statements that provide insights into the assets, liabilities, and shareholders’ equity of a company.

It is helpful for business owners to prepare and review balance sheets in order to assess the financial health of their companies.

Balance sheets also play an important role in securing funding from lenders and investors. Additionally, it helps businesses to retain talents.

Although balance sheets are important, they do have their limitations, and business owners must be aware of them.

Some of its limitations are that it is static, has a narrow scope of timing, and is subject to errors and frauds.

A balance sheet is also different from an income statement in several ways, most notably the time frame it covers and the items included.

It is important to understand that balance sheets only provide a snapshot of the financial position of a company at a specific point in time.

In order to get a more accurate understanding of the company, business owners and investors should review other financial statements, such as the income statement and cash flow statement.

Balance Sheet FAQs

What is included in the balance sheet.

Balance sheets include assets, liabilities, and shareholders' equity. Assets are what the company owns, while liabilities are what the company owes. Shareholders' equity is the portion of the business that is owned by the shareholders.

Who prepares the balance sheet?

The balance sheet is prepared by the management of the company. The auditor of the company then subjects balance sheets to an audit. Balance sheets of small privately-held businesses might be prepared by the owner of the company or its bookkeeper. On the other hand, balance sheets for mid-size private firms might be prepared internally and then reviewed over by an external accountant.

What is the balance sheet formula?

The balance sheet equation is: Assets = Liabilities + Shareholders' Equity

What is the purpose of the balance sheet?

The balance sheet is used to assess the financial health of a company. Investors and lenders also use it to assess creditworthiness and the availability of assets for collateral.

How often are balance sheets required?

Balance sheets are typically prepared at the end of set periods (e.g., annually, every quarter). Public companies are required to have a periodic financial statement available to the public. On the other hand, private companies do not need to appeal to shareholders. That is why there is no need to have their financial statements published to the public.

About the Author

True Tamplin, BSc, CEPF®

True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.

True is a Certified Educator in Personal Finance (CEPF®), author of The Handy Financial Ratios Guide , a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University , where he received a bachelor of science in business and data analytics.

To learn more about True, visit his personal website or view his author profiles on Amazon , Nasdaq and Forbes .

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A balance sheet is a vital financial statement that presents a detailed snapshot of a company’s financial condition at a specific point in time by categorizing its assets, liabilities, and equity

Key Takeaways

• Balance Sheet as an Essential Financial Tool: It is crucial for assessing a company’s financial health, providing a clear overview of its assets, liabilities, and equity.
• Reflecting Financial Position: A balance sheet offers a snapshot of a company’s financial position at a specific point in time, showing the value of Tangible Assets, Current Assets, and Current Liabilities.
• Importance of Equity in Balance Sheets: Equity reflects the owner’s stake in the company, balancing the assets against the liabilities.
• Role of Current Assets and Current Liabilities:  Understanding the balance between Current Assets and Current Liabilities on a balance sheet helps in assessing a company’s short-term financial health.
• Consultation with a Financial Advisor: A financial advisor can provide expert analysis, aiding in better financial decision-making.
• Understanding Owner’s Equity vs. Shareholder’s Equity: Owner’s Equity refers to the owner’s personal stake, while Shareholder’s Equity represents the shareholders’ claims on the company’s assets.
• Comprehensive Financial Analysis: A balance sheet, when read in conjunction with other financial statements, offers a comprehensive view of a company’s financial status.

The balance sheet plays a critical role in financial reporting by offering a clear picture of what a company owns (its assets) and what it owes (its liabilities), along with the Equity value held by its owners or shareholders. Assets are resources controlled by the company, capable of generating future economic benefits. They are classified as either Current Assets, like cash and inventory, which are expected to be converted into cash within a year, or long-term assets like property and equipment. Liabilities represent obligations of the company that result in an outflow of resources, with Current Liabilities due within a year, such as accounts payable, and long-term liabilities like bank loans.

The balance sheet also shows the company’s Equity, which includes Retained Earnings and can be referred to as Shareholder’s Equity or Owner’s Equity, depending on the business structure.

The balance sheet is essential for assessing a company’s liquidity, solvency, and overall financial health. The Current Ratio, calculated from Current Assets and Current Liabilities, is an example of a key financial metric derived from the balance sheet to evaluate a company’s short-term financial strength.

Startup Entrepreneurs

For startup entrepreneurs, the balance sheet is a critical tool in securing funding and managing growth. Consider a startup poised for expansion, seeking investors. The investors scrutinize the balance sheet for insights into the startup’s financial health, assessing current assets, current liabilities, and equity to gauge the company’s stability and growth potential.

It serves dual purposes for startups. It provides financial transparency, presenting a clear view of assets, including fixed assets, and liabilities. It’s an indispensable part of the financial triad, along with the income statement and cash flow reports. Preparing it involves detailing total assets and balancing them against liabilities and equity. This clarity is vital for strategic decision-making, particularly in evaluating short-term financial standing and planning for sustainable growth.

In real-world scenarios, startups utilize balance sheets for strategic decisions such as budget allocation and investment planning. It’s essential for understanding the company’s leverage and liquidity positions. For example, a startup might adjust its focus towards current assets for operational efficiency or manage current liabilities to maintain a healthy current ratio.

Business Students

For business students, understanding a balance sheet is a fundamental skill. As a student, look for case studies where a corporation’s balance sheet is dissected to reveal its financial health. These real-world examples will demonstrate the vital importance of the balance sheet in corporate analysis.

A thorough grasp of balance sheets enables students to evaluate a company’s financial position accurately. They learn to correlate Total Assets, including Fixed Assets, with Current Liabilities and Equity, gaining insights into the company’s operational efficiency and financial stability.

Students should learn to read and analyze balance sheets, understanding the interplay between different financial statements, including the Income Statement and Cash Flow reports. This knowledge is crucial for identifying trends, assessing risks, and making informed financial decisions.

Real-life applications of balance sheet analysis in different industries further bridge the gap between theory and practice. For instance, in manufacturing, the evaluation of Fixed Assets and depreciation policies can significantly influence profitability assessments.

Imagine a small business, “Bella’s Boutique,” a thriving local clothing store. The owner, Bella, decides to expand her business and needs to secure a loan. To do this, she turns to her balance sheet. It clearly displays her Current Assets, including cash from sales and her inventory, alongside her Fixed Assets, like store fixtures and computer systems.

It also lists Bella’s Current Liabilities, such as her outstanding supplier payments, and long-term debts, reflecting the business’s overall financial obligations. Her Equity section shows the amount invested and retained in the business. This detailed financial snapshot is crucial for Bella, as it demonstrates her business’s capacity to manage additional debt.

For SMB owners like Bella, understanding and managing the balance sheet is key to financial health. Creating one involves listing all Assets, balancing them against liabilities and Equity. This process is complemented by analyzing other financial statements, such as the Income Statement and Cash Flow reports, to gain a comprehensive view of the business’s financial standing.

In Bella’s case, her well-managed financial statements proved invaluable. It not only assisted her in securing the loan for expansion but also provided a clear framework for future financial planning.

Pre-Planning Process

In the context of the Pre-Planning Process for startups, the relevance of a balance sheet can vary. Initially, when a business is not yet generating financial data or is in the ideation phase, creating a detailed balance sheet may not be immediately applicable. This stage is often more focused on understanding customer needs, refining core offerings, and outlining a business model, as indicated in the Pre-Planning Process documentation.

As the startup progresses beyond the pre-planning phase and begins actual operations, the balance sheet becomes a critical tool for financial planning and management. It provides a clear view of the company’s financial position, detailing assets, liabilities, and equity. This information is vital for tracking the growth of the business, managing equity stakes, and making informed decisions for long-term sustainability.

While a balance sheet may not be a primary focus during the initial pre-planning stages of a startup, gaining an understanding of it is crucial for entrepreneurs. This knowledge becomes increasingly important as the business grows and starts to generate financial data, making balance sheets an essential component of effective financial management and planning.

Business Plan Document Development

In the Business Plan Document Development process, the inclusion of a projected balance sheet is crucial in the financial planning section. For entrepreneurs developing their business plans, a pro forma provides a forecast of expected Net Assets, Net Income, and Equity positions. This projection is essential for lenders or investors, as it offers a glimpse into the future financial health of the business, showcasing how the company plans to allocate its resources and handle liabilities.

However, if the business plan is still in a conceptual phase, a detailed balance sheet might not be immediately relevant. During early planning stages, entrepreneurs often focus more on defining their business model and market analysis. In these cases, itmight be more generic or simplified, primarily serving as a tool for internal planning rather than for external presentation.

Yet, as the business plan evolves and becomes more detailed, especially in terms of financial projections, it becomes increasingly important. It becomes a key document that lenders and investors review to assess the viability of the business. A well-prepared balance sheet reflects the entrepreneur’s understanding of the business’s financial trajectory, including anticipated Equity growth and Net Income generation, thus playing a critical role in securing funding and support.

Frequently Asked Questions

• What is the difference between assets and liabilities on a balance sheet?

On a balance sheet, assets represent what a company owns, such as Current Assets (cash, inventory) and Intangible Assets (patents, trademarks). Liabilities, on the other hand, are what the company owes, including Current Liabilities (short-term debts) and Long-Term Liabilities (long-term loans).

• How often should a balance sheet be updated and reviewed?

A balance sheet should be updated and reviewed regularly, typically on a quarterly or annual basis. This regular review helps in maintaining an accurate picture of the company’s financial position.

• How does equity fit into a balance sheet?

Equity on a balance sheet represents the owner’s interest in the company. It’s calculated as the difference between total assets and Total Liabilities and includes items like Retained Earnings and contributed capital.

• What are the characteristics of a balance sheet that reflects a strong financial position?

A healthy balance sheet example typically shows a balance of assets and liabilities, with a positive Net Worth. This indicates that the company has more assets than liabilities, suggesting financial stability.

• Why are previous balance sheets important for a business?

Reviewing previous balance sheets allows businesses to track their financial progress over time, identify trends, and make informed decisions for future growth and stability. It’s a vital part of analyzing the company’s historical financial performance.

Related Terms

Also see: Income Statement , Cash Flow , Equity , Financial Projections , Depreciation , Dividend , EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) , Ending Inventory , Startup Assets , Owner’s Equity

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Why is the Balance Sheet Important?

In a previous lesson we had listed out all the items that appear in an ecommerce balance sheet. Now we’ll be covering exactly why a balance sheet is important to any business, be it small or big. 

You’ll also get an idea of the various applications for this highly significant statement so that you can have a better grasp on how relevant it is to your business. Let’s begin by refreshing your memory:

What is a balance sheet? 

It is a statement that reflects the company’s financial standing at any given point in time. The balance sheet lists out all the assets (what the business owns), liabilities (what the business owes) and equity (the difference between the two) so that you can determine the true net worth of your business. 

Disregarding the balance sheet:

While a lot of small businesses prepare financial statements at the end of every year or period, these are generally set aside and rarely looked back on by owners in the course of running day-to-day business. 

However, this is a trend that can seriously affect your business adversely. Successful entrepreneurs and business owners make the most of their balance sheets and other financial statements, viewing them as a means to track growth, predict outcomes and create strategic plans. 

Why your business needs a balance sheet: A quick summary

• It helps you outline your business’s true worth, offering insights into your company, operations, liabilities, assets and so much more. 
• It gives interested investors and potential lenders a good idea of the company’s financial position, so that they can make an informed decision. 
• The major goal of any business is to make profits. The balance sheet is one of the most important tools that aid in decision making, helping you evaluate how well your business goals are being met and what areas need to improve. 

What if you own a small business? 

A lot of small business owners often pursue ecommerce selling as a way to monetize their hobbies. This leads them to question whether preparing a balance sheet is really necessary. 

The answer to that is: it depends. If you’re serious about growing your business or have some degree of aspiration, then you’ll definitely need to consider it. Here are some of the reasons why:

Long term growth

The balance sheet helps you grow in the long-term. No matter how small-scale your business, eventually you’ll need to note the rate at which your assets are depreciating and keep track of labor costs, if you want to claim tax deductions and make better profits. This won’t be possible if you don’t have a timely and well kept record; yet another reason why balance sheets are super important. 

Pitching your business to investors

It’s also worth noting that, if you plan on selling your business, you need to be able to provide an estimate of its net worth. This has to be expressed in proper terms that showcase the business’s real value – not its potential-to investors. A balance sheet enables you to do this better than any other document. 

Including all costs

Many assets have carrying costs , which take a toll on your business, without anyone even noticing. A periodically prepared balance sheet helps you determine exactly how profitable your business is after eliminating such costs. 

Eg: real estate properties that don’t appreciate faster than your country’s inflation rate add to your carrying costs.. Another example is any vehicle asset since, in addition to maintenance costs, it loses value every year. However, depreciation is good for claiming tax deductions which is yet another reason why you need a well-maintained balance sheet to show these expenses.

Key benefits of having a periodically kept balance sheet statement 

Keep interested parties well-informed 

You can learn a lot about your business and its financial health from the balance sheet. This information can be used  to guide your internal management decisions. Additionally, it helps report your financial status to interested lenders, investors and shareholders.

Spot problems ahead

Regularly keeping track of your finances can help you identify any issues or discrepancies before they become full-blown problems. For eg: consistent balance sheet reports help you ensure that your business isn’t suffering from a lack of cash flow, which happens to be a major cause of failure for many small businesses.

Determine risk and return capacity

By monitoring your current and long-term assets, you get a good grasp of your ability to generate cash flow and sustain business operations.

Keep liabilities in check and grow assets

Short and long-term liabilities, on the other hand, help you prioritise your most pressing financial obligations. The more your assets exceed your liabilities, the better off your business is and the higher your net worth grows.

Keep debt levels sustainable 

If your liabilities exceed the cash you have in hand, then you’ll have to borrow additional capital from another source. Such decisions are all made based on the balance sheet. This way, you can always stay up to date on whether or not your debt levels are sustainable. Thus, it helps you avoid long-term financial crises by taking action well ahead.

Assess working capital

The balance sheet is widely used to determine whether the business has sufficient working capital to continue its operations. Working capital is simply the difference between current assets and current liabilities. In other words, it helps you recognise whether the business is doing okay or running at a loss by taking on more debts than you’re capable of repaying.

Borrow capital for your business

The balance sheet is widely used when it comes to securing a business loan for your business. This is because just about any lender or financial institution relies on it to know your credit history , financial health, debt-repayment track record etc.

It also keeps investors informed about what their funds will be contributing to and when they can expect to be repaid.

Estimate real value

The balance sheet reflects your business’s true net worth in the form of difference between total assets and total liabilities. It is the amount you own from the company after deducting all liabilities. This is a very significant number for investors that are interested in securing a share in your company.

Potential for future operations

In other words, it helps you determine how sustainable your business is. This can be understood based on non-current assets and current assets. If your business owns property such as equipment, utilities, office space etc and their overall value is higher than that of current assets, then your business is very capable of continuing future operations.

Decide on the possibility of dividends

Dividends are issued when the company is making great returns and has a high rate of profit. The higher your retained earnings, the more your shareholders can make in the form of dividends. Whether or not your business can afford to issue dividends is a matter that can be identified using the balance sheet.

Key differences between the balance sheet and the income statement

Know your liabilities

Whereas an income statement can list out the revenue earned and the expenses made in running the business, it doesn’t offer any insights into the liabilities of the business,ie; what is owed.

For example, let’s say you’re an ecommerce seller and your sales are going through the roof. Now if you were to rely on the income statement alone, you would assume that your business is strong, financially. However, at this stage you haven’t yet considered the supplier invoices that your business owes, due in the upcoming weeks or months. This is why you need the balance sheet, so that you have an accurate understanding of your true financial standing, after deducting all liabilities.

Know your regular spending and lending habits

By comparing your accounts payable and receivable data across different balance sheet periods, you’d be able to arrive at a pretty clear picture of your business spending habits. Not only would you have a fair idea about regular customers you need to collect payment from, but also regular creditors to whom you owe money.

Know your inventory

The balance sheet offers you early warnings for many potential issues that could be a cause for alarm if you don’t pay attention. This includes imbalanced inventory levels , insufficient cash funds and higher debt obligations.

With regular financial reporting, you’d be able to spot the level of inventory your business holds at any given point in time. If your inventory makes up most of your assets column, it can drain your business in storage, maintenance and insurance expenses.

On the other hand, insufficient inventory can cause lengthy delays in fulfilling imminent customer requests which in turn, leads to a loss in revenue.

Bottom line 

For a lot of small businesses, the balance sheet is a very important statement that offers benefits and valuable insights into the company’s financial health. By contrasting what is owned and what is owed, the statement reflects how well maintained and sustainable your business truly is.

Even the most callous investors would spare a glance or two at your balance sheet before they put money into your business. This is why, if you plan on growing your venture, you need to be ready to have accurate and updated financial reports published regularly.

Business Income Statement: Examples and Analysis

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The purpose of a balance sheet

A balance sheet will provide you a quick snapshot of your business’s finances - typically at a quarter- or year-end—and provide insights into how much cash or how much debt your company has. Next, check out the Chase services built to help businesses like yours.  Presented by Chase for Business .

When you own a business, it’s important to be an accurate bookkeeper. You might be required to maintain books and prepare a balance sheet for your company for tax, legal and/or regulatory purposes. In addition, you might want to voluntary prepare a balance sheet to help you monitor the assets, liabilities and net worth of your company. Knowing how to prepare or read and understand a balance sheet is a critical skill for all small business owners. A balance sheet is part of your company’s financial statements which also include the income statement, the statement of shareholder’s equity and the cash flow statement. Financial statements are linked. For example, the balance sheet is connected to the cash flow statement as the cash balance that appears on the balance sheet is the ending balance used in the cash flow statement.

Financial statements help you and others (e.g., investors, lenders) to assess your company’s financial health.

Discover what a balance sheet can be used for and how it can help you identify financial strengths and weaknesses that exist in your company.

What is a balance sheet used for?

A balance sheet is a financial statement that reports a company’s assets, liabilities and shareholders’ equity.

Balance sheets are prepared as of a specific point in time (e.g., month-end, quarter-end, year-end).

Note: Not a period of time as the balance sheet is prepared at a point in time. A balance sheet is a financial statement that reports a company’s assets, liabilities and shareholders’ equity. 

A balance sheet includes the following elements:

• Assets:  This is anything your company owns with value. Assets can be current or noncurrent. This includes cash and cash equivalents, prepaid expenses, accounts receivable, real estate, inventory, investments, intangible assets and other assets with value.
• Liabilities:  This includes anything  your company owes. Liabilities can be either current or noncurrent. Some examples include interest payable on loans, accounts payable (e.g., rent, utilities), long-term debt (e.g., loans) and deferred tax liability.
• Shareholders’ equity:  This refers to anything that belongs to the shareholders of your company after accounting for any liabilities, Also known as net assets, shareholders’ equity is the difference between a company’s total assets and its liabilities. In small businesses or sole proprietorships , net assets are referred to as owner’s equity.

Four ways to use a balance sheet

Preparing a balance sheet can help in any number of situations. Here are four ways you can use a balance sheet for your business.

1. Assess your company’s financial standing and health

A balance sheet gives you a snapshot of your company’s financial position at a given point in time. Along with an income statement and a cash flow statement, a balance sheet can help business owners evaluate their company’s financial standing. For example, when your company’s current assets are more than its current liabilities, you’re likely in a good position to cover any short-term financial obligations.

2. Compare your business to your competitors

Looking over your balance sheet can also help you determine how you stack up against other businesses in your industry. If you want to improve your company’s financial health, use the balance sheet to determine which financial habits need adjusting to help you compete better. You can use the following ratios to compare your business with others.

• Debt-to-equity ratio:  This helps you determine your company’s financial leverage. To use this ratio, divide your company’s total liabilities by its shareholders’ equity.
• Quick ratio:  This helps you to determine whether your company has enough current assets that it could liquidate to pay off its current liabilities. To use this ratio, add up your cash and equivalents, marketable securities and accounts receivable. Then divide the sum by current liabilities.

3. Conduct financial health assessments 

A balance sheet can help you tracking the performance of your company, for example, your company’s ability to meet financial obligations. In addition, it allows you to compare your current balance sheet to a prior balance sheet to better understand how your company is doing over time. For example, have the assets of your company increased or has your company accumulated more debts?

4. Support an existing or potential investor’s review of your company’s net worth?

Investors use a company’s balance sheet to assess a company’s net worth as part of their review of possible investments.  Investors also use the balance sheet to calculate financial ratios to determine a company’s financial standing, including:  

• Debt-to-equity ratio:  This represents a company’s total liabilities divided by its shareholder equity. See the formula above. The debt-to-equity ratio helps companies and investors determine the degree to which a company is financing its operations  through debt vs their own funds. 
• Quick ratio:  This determines whether a company’s short-term assets or quick assets are sufficient to cover its current short-term liabilities. See formula above.

Tips for preparing a balance sheet

The following tips can help you prepare a balance sheet:

• Determine the reporting date  (e.g., December 31)  and prepare your balance sheet in regular intervals  (e.g., annually) - this will allow you to compare your company’s current financial position to prior periods and track changes.
• List your company’s assets, liabilities and determine which are current and which are non-current  – this will help you to better understand what your assets and liabilities are and how best to categorize them. 
• Calculate the shareholders’ equity and check that your balance sheet balances –  this will help you to spot any errors.
• Use a balance sheet template or example  – this will help you with the format.

Once you know where your business stands,  meet with a local business banker  to learn more about  financing options  and how opening a  business bank account  or applying for a  business credit card  might be right for you.

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The Importance of Balance Sheets in a Business

The balance sheet is one of three important financial statements intended to give investors a window into company's financial condition at a specific point in time. A strong balance sheet usually means high qualify assets, including a strong cash position, very little or no debt and a high amount of shareholder's equity. All else being equal, a company with a solid balance sheet can endure tough economic cycles compared to one with a weaker financial footing.

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Together with the income and cash flow statements, the balance sheet provides investors with an overview of the company's financial condition. The balance sheet in particular shows what the company owns in terms of its assets and what it owes. Together with accompanying footnotes, the balance sheet informs an investor about the company's assets and liabilities at a specific point in time. Essentially, the balance sheet shows the company's net worth after taking its assets less its liabilities.

The balance sheet separates assets into two categories: short term and long term assets. Short term assets include cash, inventory and accounts receivable. Besides plant and equipment, long term assets include real estate holdings, patents and goodwill. Looking at a balance sheet an investor can quickly determine how much cash a company has which is particularly important for funding operations and working capital. The balance sheet discloses a company's hard assets such as plant and equipment and management's assessment of the useful life of its assets based on the rate of depreciation.

Liabilities

The liability side of balance sheets discloses how much a company owes. For example, a company with higher levels of long term debt is at greater financial risk versus one with little or no debt. Short term debt on the balance sheet refers to debt due in one year or less. A prime example of short term debt is accounts payable. A high level of accounts payable suggests heavy use of vendor financing to fund operations, which may be an indication of cash flow issues.

The shareholder's equity portion of the balance sheet discloses how much money investors put into the company. Equity includes par value of the company's common stock, usually a nominal per share value such as $1 and additional paid-in-capital which is the amount of money shareholders put into the company above par value. Retained earnings are the portion of a company's net income it decides to keep rather than pay out as dividends. A conservative company usually maintains a high level of retained earnings to reinvest in the business, pay down debt or return to shore up its balance sheet in case of economic uncertainty.

Financial statement analysis examines various components of company's financial statements to identify existing relationships and what they mean for the financial condition of the company. For example, using a company's balance sheet, an investor can quickly calculate the ratio of current assets to current liabilities. A company with a higher current ratio is in better financial position than one with a ratio of less than 1. Likewise, the debt-to-equity ratio compares the company's debt level to shareholder's equity. A higher amount of debt to equity places a heavy financial burden on the company and its shareholders.

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Sun Acquisitions is a Chicago-based business broker and M&A firm. Our team of advisors specialize in buying, selling, and acquiring privately held companies. We can help you sell your business.

The Importance of the Balance Sheet

May 29, 2020 by Sun Acquisitions

What is a balance sheet and how important is it when you’re selling a business?

Every incorporated business in the United States is obliged to have a balance sheet. It is not mandatory for partnerships and sole proprietorships but it is highly recommended that these small businesses adhere to this sound accounting principle.  A business’ balance sheet is one of the best ways to demonstrate the financial health of the company. It demonstrates financial diligence on the corporation’s part. For the buyer, three financial statements you absolutely should receive from the seller are the income statement, the balance sheet, and the cash flow statement.

It’s easy to focus solely on your business’ tax returns and income statements and ignore the balance sheet.  The reality is that the lack of a balance sheet that accurately reflects the operation of the business is a real hindrance when it comes time to raise capital, secure supplier relationships or exit your business.  Here are a few important reasons to keep a balance sheet .

1. A balance sheet gives a comprehensive overview of the health of a business

Your balance sheet should display in a manner that is easy to read and follow the business’ assets, liabilities, earnings, and equity. Assets include cash, land, infrastructure, and equipment. Assets may be tangible or intangible, movable, or immovable. Liabilities include the payroll, utilities, interest, employee medical insurance, building rent as well as any contributions you’re making to pension plans.  Equity refers to what’s left after liabilities have been subtracted from the assets. And finally, retained earnings is the profit that the business gets to keep, these are earnings that are not shared with the shareholders.

2. The balance sheet may be used to meet financial obligations

Interested parties looking to buy your business may want to understand how they will be able to meet their financial obligations. Perhaps they will want to sell shares of the company. They can only do this if they have an idea of the company’s financial position. From the balance sheet, they’ll be able to analyze potential rates of return and also have a snapshot of the capital structure. As a buyer what are you hoping to achieve with the business in the next few years? Do you want to grow the business beyond its current setup? Given the liabilities and assets in possession do they give you leeway to expand or debts may restrict your ambitious goals?

3. The balance sheet may be used to secure lines of credit

According to a survey carried out by the Small Business Administration, at least $600 billion is loaned to small businesses every year. And just what is the average loan amount? In 2017, the average amount loaned to SMEs was $663,000. It’s not hard to see that investors are very happy to seed money into ventures that look lucrative and promise to deliver credible returns.

One of the biggest reasons sole proprietorships and partnerships find it difficult to secure lines of credit is a failure to show a balance sheet. The ability to show creditors good accounting records gives them the confidence to release funds. A business’ balance sheet will be able to demonstrate that the business is in a good place and has the potential to become bigger with the right financial muscle backing it up.

4. A balance sheet can show areas that need improvement

A balance sheet is like a doctor’s report. It shows the areas that need improvement, the areas that are in good shape, and those that could do with a little more attention. To add on, the balance sheet can also highlight specific places that are causing the business to lose money. Perhaps its overhead costs which need to be lowered – moving into a smaller space, downsizing the company, or finding contractors with cheaper equipment to hire. Maximizing value can only happen when you can clearly see what’s working and what’s not.

5. A balance sheet shows a good financial practice

If the corporation is already listed on the stock exchange or you’re still in the initial stages of preparing to go public, your financial statements will be appraised to ensure that everything checks out. Government agencies, stock, and banking regulators use a company’s balance sheet to screen for possible financial malpractice. Fraudulent activities can often be tracked on balanced sheets. By regularly going through a public company’s balance sheet, stock market regulators are able to detect any financial malpractice.

6. Win the trust of your suppliers with audited balance sheets

Most businesses rely on suppliers and creditors to stay afloat. If you’re running an operation that needs you to purchase raw materials from another company, having good credit (which can be shown by your balance sheet) is a surefire way to win their trust. Suppliers want to do business with companies they know are reliable and trustworthy. Hence the importance of a balance sheet can never be overestimated if you’re building a business.

7. A balance sheet allows for efficient business management

In order to manage the company efficiently, it’s key to know the numbers – debt funding status, current cash flow, asset investments, status of trade receivables, and company liquidity situation. Planning for future expansion is only possible if you know how the company is doing. Looking at the balance sheet as a buyer you might also be able to see whether or not there is a future and other hidden reasons the seller might be selling.

Discuss financial statements with a business broker

Business brokers such as Sun Acquisitions have decades’ worth of experience working with

buyers and sellers to get their business papers in order before a sale. Sit down with an experienced broker and go over your dossier as part of your financial diligence process. Work with the best broker team in the industry and contact us today.

Get in touch with one of our advisors to learn more about how Sun Acquisitions can help during business mergers and acquisitions.

Disclaimer : Any information provided in this blog is not intended to replace legal, financial, or taxation advice given by qualified professionals.

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James Webster, Executive Chairman, ROK Financial .

Setting financial goals for your business may be one of your most important responsibilities as a leader and business owner.

Your financial goals serve as far more than wishful projections to attract attention from potential investors. They form the backbone of your projected road map for success, internal and external. Something that every single business should possess regardless of its market, model or size.

In my experience and role, I've had the opportunity to assist other business owners through my networks and suggest ways in which they, too, can set and track their financial goals. For example, I once heard a business owner indicate that they blindly set their financial goals. They wanted to see a 15% increase year over year. However, they weren't constantly monitoring the current state of their business or identifying throughout the year areas in which they needed to turn up or cut back expenses to make that goal attainable. We sat and discussed ways that receiving monthly reporting from their teams on sales and expenses could allow him as a leader to steer the ship in the right direction.

Data is key to all business decisions and must be used when making financial decisions. Having goals is great (and you should do so), but they should be goals that accompany your data to make them achievable.

Why You Need Tangible Goals

Setting your business goals gives you the foundation to build projections, direction, purpose and core metrics to measure your honest success and failure. You want to set these goals for risk mitigation as well as motivation and accountability.

Making tangible goals provides a solid framework for risk assessment. First, it lets you see potential financial pitfalls before they happen. Seeing, measuring and visualizing the criteria you need for success also reveals the criteria for failure. Both serve as two essential sides of the same essential coin. Especially for younger and smaller businesses relying on smaller amounts of capital. Secondly, setting realistic financial goals also allows you to create strong contingency plans for the potential pitfalls you identify. Remember, the only thing worse than being in a terrible financial situation is being in a terrible financial situation with no plan of escape.

More and more businesses are becoming aware of how creating team, department and even company goals can motivate individuals into action.

When there's a clear desired outcome, the team is more likely to harmonize together on achieving it. By clarifying specific targets and objectives with core metrics, the team members can better comprehend their collective responsibilities. This can lead directly to better communication, effort and efficiency.

How To Set Financial Goals In 5 Steps

1. evaluate your current financial state.

As a business owner, you start building financial goals by painting a clear picture of the business's current performance.

Your battle plan always starts with an in-depth analysis of your performance. Use all the information at your disposal to paint an internal and external picture. This should include assessing revenue streams, expenses, debts, cash flow or anything that can help you understand where. All of it will serve to set realistic and achievable financial goals. The more information you can draw from, the better off you'll be.

2. Define Clear Objectives

Write out what you want to achieve and be as specific as possible. The main advantage of setting goals lies in their tangibility and measurability. So committing to vague goals like "increase profits'' is only going to hinder you.

Instead, you should opt for a specific target like "boost monthly net profit by 15% within six months." Make sure to use as many solid metrics as possible when you're describing your objective. Relying on numbers will ensure that everyone understands the desired outcomes.

3. Align Them With Your Business Strategy

Your financial goals must align with your overall business strategy. This means taking into consideration factors such as company values, mission statement and long-term vision. Goals should support and contribute to the bigger picture of what you want to achieve with your business (not just financial). Any financial goal you set should align with your business strategy seamlessly. If you're aiming for market expansion, it needs to be tangibly reflected in the necessary investment and revenue targets.

4. Break Down Goals Into Achievable Milestones

Large goals can be overwhelming. When you have your own business goals, you want them to serve as guiding and motivating future achievements. If you make them feel unattainable, they can turn into looming reminders of failure—which is the opposite of what you want to see. Take all of your goals and break each down into small achievable milestones. This will also give you opportunities for celebrating incrementally on the path.

5. Assign Responsibilities

You need to assign responsibilities for each separate goal. One good method for doing this is assigning key teams or departments to a specific financial goal. Make each one responsible for driving the initiatives associated with the financial objectives. Initiate a plan of action and milestones that should be met to achieve a set goal.

Allow your team to feel a deep sense of shared achievement. Make each department responsible for a portion of that goal; this way they have a sense of the company win being their win as well.

Tips For Keeping Track Of Small-Business Finances

Your financial goals need to be tangible, solid and measurable. You'll notice a crystal clear correlation between how effective your financial projections are and how measurable they can be. Plus, if you don't make them coherent, they'll become detrimental to your decision-making process instead of helpful.

Regularly Reconcile Accounts

You should be reconciling everything from bank statements to credit card statements, or anything else you can use to paint a financial picture. In fact, every responsible business owner should be doing this consistently. Regularly reconciling your accounts ensures that your records are accurately reflecting your transactions. This information is not just for your financial goals. It also factors into the general management of your assets and capital. Reconciling your accounts will serve as one of your primary methods for identifying financial discrepancies.

Monitor Cash Flow

Monitoring your cash flow is another source of financial information you should be measuring constantly. This should be something that you're doing well before you even begin to make financial projections, and should be taken into consideration when making those projections. It should be a pillar of all your future goals. And it should serve as another core metric of how well your goals are being met as you move forward.

Remember, financial goals aren't just numbers on a spreadsheet. They're the heartbeat of your business's financial health. But they also serve as a means to unite and motivate your staff. Creating a healthy and competitive culture that is all the more qualified to achieve success. Both the short-term and long-term.

Forbes Finance Council is an invitation-only organization for executives in successful accounting, financial planning and wealth management firms. Do I qualify?

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Paramount to cut 15 percent of u.s. workforce in major layoff plan.

The company is also exploring “potential strategic partnerships” for Paramount+ and is reevaluating its portfolio with an eye to improving its balance sheet. 

By Caitlin Huston

Caitlin Huston

Business Writer

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Paramount continued to push forward on its $500 million cost-savings plan and goal of reaching sustained profitability in streaming by 2025, in the company’s first earnings report since the Skydance deal was announced. 

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Paramount tv studios shutting down amid major restructuring, layoffs, nickelodeon, paramount+ marketing exec sabrina caluori exits.

Paramount Global had 21,900 employees worldwide as of the end of 2023, but eliminated an estimated 800 positions in February.

The company is also exploring “potential strategic partnerships” for Paramount+ and is in active discussion with “multiple parties” in an effort to reach sustained profitability on the service. Management said this could include licensing as well as joint ventures or partnerships. Paramount is also reevaluating its portfolio with an eye to improving its balance sheet. 

“The set of assets that make up Paramount Global today were built up through the rise of linear and while we have strong brands and businesses, we must reshape our portfolio to best compete in the future,” said Paramount co-CEO Chris McCarthy. “The assets under consideration are undeniably strong with exciting futures ahead, but will be better served on their own or as the centerpiece of another business.”

The $500 million is included in the $2 billion of cost efficiencies identified by Skydance. In connection with these actions, Paramount expects to incur a restructuring charge of approximately $300 million to $400 million in the third quarter, with the cash impact occurring over the next several quarters.

In the company’s second-quarter earnings report, Paramount reported direct-to-consumer revenue up 13 percent year-over-year to reach $1.8 billion and an adjusted profit figure of $26 million, after a loss of $424 million a year ago. The change in income was attributed to the revenue growth and lower costs for marketing and content.

Overall, Paramount reported an operating loss of $5.3 billion, after a loss of $250 million a year ago. The company attributed the change to a “goodwill impairment” charge of $5.98 billion for its cable networks reporting unit, which comes amid the estimated company market value for Paramount amid the Skydance offer and a decline in pay TV.

Revenue fell 11 percent year-over-year to $6.8 billion, with a 17 percent drop in revenue in the company’s TV Media division and an 18 percent drop in filmed entertainment. The drop in TV revenue was largely attributed to fluctuations in licensing revenues, which dropped 48 percent, as well as declines in the linear advertising market.

While helped by the releases of IF and A Quiet Place: Day One , theatrical revenues suffered by comparison to the release of Transformers: Rise of the Beasts in the prior year.

Within the company’s streaming segment, subscription revenue grew 12 percent, which the company said was driven by year-over-year subscriber growth and pricing increases for Paramount+, while advertising revenue rose 16 percent, due to growth in Paramount+ and Pluto TV. Paramount+ revenue is up 46 percent year-over-year.  

On July 7, Shari Redstone agreed to sell control of Paramount Global to a consortium led by Skydance, the production company helmed by David Ellison, and Gerry Cardinale’s RedBird Capital.

If a serious bidder emerges, the go-shop period can be extended to Sept. 5, per the filing. However, if Paramount does not choose to go with the Skydance offer, it will be forced to pay a $400 million breakup fee. If the transaction is approved, it is expected to be completed in the first half of 2025.

In the interim, Paramount co-CEO Brian Robbins said the company is consulting with Skydance on “very specific, limited things,” but that the company has been supportive of their strategic plan.

“Our strong performance in Q2 demonstrates that we are delivering on our strategic priorities. We are proud of our results, including significant earnings growth largely driven by our DTC segment. In fact, for the fourth year in a row, Paramount+ is leading the industry in domestic sign-ups driven by our big broad hit TV series and blockbuster films. DTC profit growth for the past four quarters has totaled nearly $900 million and we are on track to reach domestic profitability for Paramount+ in 2025,” the company’s co-CEOs, George Cheeks, Chris McCarthy and Brian Robbins, said in a statement.

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