Balance Sheet templates Start the discussion!

What is a balance sheet?

A balance sheet is a comprehensive report of a business’ financial situation at a given time, detailing the business’ assets, liabilities and shareholder equity. The balance sheet gives a quick overview of what exactly a business owns as well as what it owes. Furthermore, it documents what exactly has been invested by its shareholders.

The premise of the balance sheet is based solely upon one equation:

Assets = Liabilities + Shareholders’ Equity

Broken down, this equation means that a business’ assets (ie everything that the business owns) must be paid for in liabilities (ie borrowing money) and shareholder equity (ie taking the funding from investors). Therefore, the balance sheet is an incredibly simple yet essential document for any business.

The balance sheet should always balance, so that your business’ assets are equal to its liabilities and shareholder equity.

Why are balance sheets important?

The balance sheet is of vital importance to any business, as it gives a quick snapshot of the overall health of the company. The balance sheet allows business managers and owners to quickly establish the financial strength of the business, and determine what direction it should move in. It will help them decide whether they are in a position to reinvest and grow, or whether they must take more conservative measures in order to improve its financial situation.

The balance sheet allows you to quickly establish whether your business is currently in a position to fund its assets. As such, managers can take steps to boost cash reserves when the financial performance is poor.

Why do you need a balance sheet?

Businesses need balance sheets for numerous reasons. One of the main reasons that businesses use balance sheets is the fact that they are absolutely essential when attracting potential investors. Investors are often keen to know what exactly the company is worth and its financial health. As such, if looking for investment, a balance sheet is absolutely essential.

When planning for the future, a balance sheet for your business is also incredibly important. You won’t be able to plan for your business’ financial future if you do not have a grasp of its current financial health. Therefore, it is essential to construct a balance sheet when constructing a plan for your business’ financial future.

Balance Sheet Definition by Investopedia.

Balance Sheet Examples by the Corporate Finance Institute.