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
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.
- 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 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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