How to Make a Balance Sheet to Help You Reach Business Goals
You opened a business. Now, you probably want to see it grow. You put in the work each day. You work weekends. Your friends might party, but you plan your next move. Your business savvy can pay off. You just have to make a plan, set some goals, make a budget, and stick to it.
How Can I Make a Balance Sheet?
You can use a simple, straightforward, everyday financial report called the balance sheet to help you plan and stay on track. This report lets you see at a glance how your business performs.
Banks and other financial institutions also expect to see this report when they consider your business for a loan or a line of credit.
The balance sheet, though common and simple to put together, wields great power.
Updating Your Business Plan and Goals
You need to update your business plan annually. The fifth step in this eight-step process requires you to create a budget. If you need to create your first business plan, this may seem like an ideal first step, but you need to conduct the other four first, so you have the right background information.
While we’ve covered other aspects in articles, this article focuses on using your balance sheet to set your business goals. Let’s briefly review all eight steps, then jump into how to step five’s budget will help you. That provides us the context for how a monthly and annual balance sheet fits into goal setting and attainment.
The Business Planning Cycle
Evaluate your business’ effectiveness. Compare its year-to-year performance.
Conduct a SWOT analysis paying close attention to opportunities and potential threats.
Analyze business successes and failures of the past year.
Conceive your business goals based upon ideal settings. This is what you want to achieve in the coming year that you would like to formally add to the updated annual plan.
Create your budget.
Set budget goals.
Write the plan’s specifics according to the completed budget and goals.
Review the plan on a quarterly basis.
Creating your balance sheets occurs in step one, but it helps with steps three, five, six, and seven. You cannot effectively do step five at all without step one’s balance sheet. That is because if you already have a business, you must know how much money and assets you have before you can create a budget. The growth you want to achieve must come within the parameters of you paying all the bills your business already has. You can’t forgo the electric bill to advertise. That would not make logical sense.
What a Balance Sheet Tells You?
Your business’ balance sheet shows the complete financial picture of your company.
You will also come across the term statement of financial position and it means the same thing. This statement reveals your company assets, its liabilities, plus its equity at a specific date.
You could create a balance sheet at any time, but typically you put one together at the end of a finite accounting period such as the month or the quarter.
How to Make a Balance Sheet?
Your accountant handles this for you. If you do not have an accountant, you have to do it yourself.
Bummer.
You need to learn how to make a balance sheet.
You need your business’ adjusted trial balance for most of the items including your assets and liabilities. Look at your retained earnings statement though for your owners’ equity. You might have these reports and not realize it. If you use QuickBooks or software like it, these programs have a single click option for producing these reports. If you use PayPal for accepting payments, you can find part of the information easily, but typically, you can only get your sales reports from it. You can also use these programs to create your balance sheet. Even free programs like those from Zoho do this for you. The upshot is that it is easier than you think.
Your balance sheet has three essential sections:
#1 The Assets Section
The assets section of the balance sheet lists all the liquid and non-liquid assets of the business. You should group similar assets, for example, list all of your real estate holdings in a sub-section, listing the value of each. You do not need to line item individual stocks your company owns, but you should differentiate between your stock portfolio, real estate portfolio, and cryptocurrency portfolio.
You should divide assets into current and non-current assets. Your business's current assets include cash, the equivalent of cash, prepaid expenses, advance payments, accounts receivables, inventories, and short-term investments. The non-current assets consist of an asset that provides a long-term benefit such as equipment and machinery, long-term investments, manufacturing plants, real estate, and intangible assets.
Your finished balance sheet lists the current assets first. These are your liquid assets. Your non-current assets come in a separate sub-section beneath the current ones. These are your non-liquid assets.
#2 The Liabilities Section
Your liabilities section only lists obligations to other individuals and organizations outside of your business. This typically means your vendors, creditors, etc. It does not include partners in the business.
Your liabilities section also contains current liabilities and long-term liabilities. The current liabilities section contains the financial obligations you would need to meet within one year. This section defines long-term liabilities simply. It’s any liability that is not current. Anything longer than one year gets lumped as a long-term liability.
#3 The Owner’s Equity Section
The balance sheet’s owner’s equity section contains the obligation of the business to its owners. The term owners also mean partners. If you have a silent partner in your business, the money or stock, or equity owed to them goes in this section. Use the term owners’ equity when you own a sole proprietorship or a partnership, but the term stockholders equity when you own a public company.
Formatting the Balance Sheet
So, if you did not luck out and find a program like QuickBooks or Zoho that formats everything for you, you need to do this yourself. You get two options:
Account format,
Report format.
When you pick the account format, you essentially divide the page by the assets on the left side and the liabilities and owners’ equity on the right side. The liability section goes at the top while the owners’ equity goes beneath it.
Using this option makes it simpler to make sure you do it right. That’s because when you finish entering the information, the left side assets and the right side liabilities and equity equal one another. If you have different numbers at the bottom of both sides of the page, to put it kindly, you screwed it up. Using the account format makes it really simple to see if you made a math mistake since it uses a really clean layout.
If you choose the report format, your balance sheet shows the financial sections and data vertically. Each section goes one on top of the other with assets at the top, liabilities in the middle, and the owners’ equity sections presented at the bottom.
How the Balance Sheet Helps You?
The balance sheet shows you how healthy your business is. You can glance at each section and quickly know how things are and whether you have more or less money than you thought.
You will have a balance sheet for each month of doing business. You will also have an annual balance sheet. You need these to see your month-to-month growth or decline.
Ack! What?
Yes, your balance sheet could show that your business is behind in sales or trailing last year’s numbers as some folks like to say. You could just as easily discover that you increased your sales month-to-month and year-over-year, and wouldn’t that be awesome? You would want to know that, right? Throw yourself a pizza party or something.
Believe it or not, you finally get to set some business goals at this point. You created all your balance sheets and you got them to balance properly without fudging any numbers. Your assets equal your liabilities plus your owners’ equity and that is a beautiful thing!
So, goal setting…
What Does a Business Goal Do?
Your business goals list establishes in writing the priorities of your business. As well as goals, you set specific objectives and milestones to help your business reach these goals. Think of a goal as a broad brush item that encompasses your business’ overall purpose, set an end goal, and you can accomplish in a limited time period.
Your company would have one set of goals while within its structure and each department would develop its own. During performance reviews, each manager would set goals with each employee.
Goals produce a metric by which a business can determine its success. It also provides a way to unite employees in their work, so they understand and focus on what the organization finds important. These goals can help guide decision-making within the business.
The objectives provide steps within the process of reaching the goal. Each tie to a milestone.
For example, your goal might be to increase your customer base by ten percent. You would set a monthly objective of one-twelfth of that figure. Your milestone would be the number of customers by the close of the business day at the end of the month.
How that Ties in with Balance Sheet?
Your balance sheets enter the picture twice — goal setting and milestone metrics. You cannot set a goal arbitrarily. You must have the funds available to achieve the goal. This means you need to know what your goal will cost.
Before you set your ideal goals, you need to know how financially healthy your business is. To hone those goals into workable items you can formally add to your business plan, you need to determine what you can spend on the goals. You either must cut something from the existing budget, reduce it, or make more money to afford to pay to achieve the new goals.
Let’s go back to the increased customer goal. Regardless of how you achieve that, you have to spend money. Perhaps you increase your advertising. Maybe you start a blog. You might send out direct mail letters or postcards. The product that sells product costs money. You cannot count on the forecasted increase in revenue because any shortfall will throw you into debt. You must have the money first. If you did not make a profit the year before, you must reduce or eliminate some line items from your budget to free the money to pay for growing the customer base.
How do you know you met your milestone?
Those monthly milestones or quarterly milestones provide helpful metrics by which you can determine whether your firm remains on track for achieving the milestone for that period. Your monthly balance sheet shows you this. You will need to examine your monthly sales report to analyze the specific data on how you met the milestone.
How do you know how much money you can budget for new goals?
When you were planning your budget, you used last year’s budget and the past twelve months of balance sheets. That lets you forecast what you will obtain each month based on the prior year. You can see what you will have to spend each month, and this lets you set your budget.
Learning Balance Sheets and More
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