Tip #126: Understanding Your Business’s Balance Sheet

Tip 126: paying off debts before you sellAs a business owner, one of the most important documents to understand is the balance sheet. This sheet helps show buyers the big picture of what they’re going to acquire, and it’s one of the important business sheets we highlight in our past post about making sure your business looks good on paper.

Looking at the balance sheet, your buyer will be able to tell which assets are short-term, and which they can expect to be productive in the future. It helps them evaluate the amount and types of assets your business has, telling the story of how the company is doing and what liabilities your new buyer will inherit.

Balance Sheet Basics

The basic formula of the balance sheet looks like this:

Assets = Liabilities + Shareholders’ Equity

Your business’s assets are balanced by your company’s financial obligations, along with any relevant equity investments and retained earnings.

It’s important to note that the balance sheet is constantly changing and represents the status of your business at only 1 point in time.

Types of Assets

There are two main types of assets, current and non-current.

Current assets have a lifespan of one year or less, so they can be easily converted to cash. Examples include:

  • Cash
  • Cash Equivalents (e.g. US Treasuries, Non-restricted Bank Accounts & Checks)
  • Accounts Receivable
  • Inventory
  • Raw Materials
  • Work in Progress Goods
  • Finished Goods

Non-current assets cannot be quickly turned to cash. They either have a lifespan of longer than 1 year, and/or can be turned into cash within a year. Examples include:

  • Tangible Assets (e.g. machinery, computers, buildings, land)
  • Intangible Assets (e.g. goodwill, patents, copyright)

With non-current assets, it’s important to note that depreciation is a factor that needs to be calculated and deducted.

Types of Liabilities

Liabilities are financial obligations owed to external parties. Long-term liabilities are due after a period of 1 year or more, while current liabilities must be paid within the year.

Shareholders’ Equity

This represents the amount of money invested in a business. If, at the end of a fiscal year, you decide to reinvest your business’s net earnings, that will be transferred from the income statement and onto the balance sheet and into the shareholders’ equity account. That account represents your company’s total net worth.

The Bridlebrook Group Can Help Sell Your Business

If you need help understanding your balance sheet or don’t have time to run your business while preparing it for sale, contact The Bridlebrook Group for help.