How to Prepare a Balance Sheet For a Startup Company
Starting a new business comes with a long to-do list. Throughout the new and exciting process, you may have heard the term “balance sheet” being thrown around. If you’re new to the finance and accounting realms, this may be your first encounter with this term.
As investors, lenders, and other third parties begin requesting this document, it can feel overwhelming. The balance sheet is a fundamental component of any successful startup, making it important to understand the basics, the importance, and how to properly prepare one for your startup company.
How to Prepare a Balance Sheet for Startups
What Is a Balance Sheet?
A balance sheet is a financial statement that outlines everything your business owns, owes, and has earned in the past. The goal of this document is to give transparency into the financial health of your startup.
The items your company owns are called assets, while the components your company owes are called liabilities. Assets and liabilities are broken down between short-term and long-term. Short-term assets and liabilities are those that are expected to be received or paid within the next 12 months. Anything over 12 months is considered long-term.
Your past earnings are displayed in shareholders’ equity, often referred to as member equity and owner’s equity, depending on your business structure.
The balance sheet is prepared at a point in time, meaning the accounts don’t get cleared out at the beginning of the period like the income statement and cash flow statement. This can make it confusing as each of these financial reports is intertwined.
What Does a Balance Sheet Look Like?
A balance sheet is broken down into the previously mentioned categories: assets, liabilities, and equity. One positive of the balance sheet is that you can always tell if you are missing something. Here is the equation for calculating a balance sheet:
Assets = Liabilities + Equity
This equation, often referred to as the accounting equation, outlines if transactions or adjustments are missing. Both sides must always be in perfect balance. Keep in mind that there are multiple subcategories in each large section, which we will discuss later on.
Why Is the Balance Sheet So Important for Startups?
Creating the balance sheet gives indispensable insight into your startup. After all, the goal of the balance sheet is to provide clarity into the financial health of your business. The more insights you have, the stronger your decisions will be. Instead of just guessing if you should buy a new piece of equipment or how much funding you really need, you can back your decisions with data This cash balance is also very important. A lot of the time, startups are cash burning and having a pulse on that (knowing when to fundraise) can better help you plan.
Additionally, you can clearly see when your company is growing by using a balance sheet. Increasing assets means your business is growing. However, if your liabilities are increasing at a quicker rate compared to assets, you may need to rework your financial strategy. Drawing these conclusions wouldn’t be possible without calculating a balance sheet.
Furthermore, the balance sheet is a fundamental component when you are looking to obtain capital, whether that be from investors or lenders. Before third parties decide on giving your startup money, they want to see your current financial position and ensure that you won’t default on any payments. This is especially important if you are receiving funding that is backed by collateral, such as equipment.
How to Prepare a Balance Sheet for a Startup Company?
Before you can accurately create a balance sheet, you need to understand what data goes into this document and determine the proper cut-off. Remember that the balance sheet is as of a certain date, meaning you need to pull the information pertaining to that date. Using the wrong data can lead to a balance sheet that does not balance. Most startups will pull the balance sheet monthly, quarterly, and annually, easiest if you have an accounting software (like Quickbooks or Xero). Otherwise, the following will be manual ways to build the balance sheet.
After you have chosen your date, you can begin listing the assets of your startup. Common current assets include cash, accounts receivable, inventory, and prepaid expenses. Assets are placed on the balance sheet in the order of liquidity, meaning cash should usually be your top line.
Your startup might also have long-term assets which can include intangible assets and fixed assets. Intangible assets are non-monetary assets, such as goodwill and non-compete agreements. Fixed assets can take on many different forms, like vehicles, equipment, office furniture, and computers.
Once you add up your short-term and long-term assets, you will get your total asset number, which will be used to determine if your balance sheet balances.
The next category found on the balance sheet is liabilities. Like assets, liabilities will have two separate categories: one for short-term and one for long-term. Short-term liabilities include everything that you expect to pay within the next year, such as accounts payable, wages, business credit cards, and any debt payments due in the next year.
Long-term liabilities commonly include notes payable and mortgages. Adding up your short-term and long-term liabilities will generate your total liabilities.
The last section on the balance sheet is owner’s equity. This section will have a few different line items, which can vary depending on your business structure. First, there will be retained earnings, which represent all the income or loss your startup has generated since inception. Retained earnings will also hold the current year’s net income or loss.
Next, there will be information about contributions, distributions, and ownership. Contributions are amounts that a partner or member has given to the company, while distributions represent money taken out of the company. Corporations will also display shares owned, including common stock, preferred stock, and any additional paid-in capital.
The components of owner’s equity plus liabilities should equal the total assets. If they don’t equal, you may be missing items.
Don't Hesitate For Your Free Consultation
The good news is that you don’t have to create a balance sheet from scratch. In fact, there are various free templates or software available for you to fill in. However, if you need help deciphering where transactions should go, don’t hesitate to reach out to a qualified accountant, like our team at AgileCPA Professional Corporation.
Our team can help you generate accurate and timely balance sheets, giving you the insight needed to guide your startup to success. Reach out today to learn more.
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