When you start a business and apply for a startup loan, you may be asked for several specific startup financial statements, including a profit and loss statement, cash flow or sources and uses of funds statement, and a balance sheet. Creating these financial statements may seem pointless because you don't have an ongoing business at this point. But it's still important to put down your estimates in writing, including a balance sheet.
What Is a Balance Sheet?
A balance sheet is a business statement that shows what the business owns, what it owes, and the value of the owner's investment in the business. The balance sheet is calculated at specific points in time, such as at a business startup, at the end of each month, quarter, or year, and at the end of the business.
A balance sheet is organized into two sections. The first section lists all of the company's assets. The second section lists the firm's liabilities and owner's equity (for a small business) or retained earnings (for a corporation.
The company's total assets must equal the sum of the total liabilities and total owners' equity; that is, the totals must balance.
This formula, Assets = Liabilities + Owner's Equity, is called the accounting equation.
The accounting equation format is the basis for the layout of a balance sheet.
Why Do I Need a Balance Sheet?
The balance sheet is an important document that provides information for a lender, who looks for specific information about the business to use in consideration for a startup loan. It is also important to the business owner because it gives a snapshot of the business at various points in time.
For a business startup without a history, the balance sheet shows the financial position of the business as of the startup date, including what has actually happened at the current stage of the startup and what will happen before the date the business starts.
Steps in Preparing a Business Startup Balance Sheet
All the calculations in this spreadsheet are done as of the date of startup.
First, list the value of all the assets in the business as of the startup date. This includes cash, equipment, and vehicles, supplies, inventory, prepaid items (insurance, for example), the value of any buildings or land owned. (Usually accounts receivable are included as an asset, but since the business has not started, there should be no amounts owed to the business).
Next, list all liabilities (amounts owed by the business to others), including business credit cards, any loans to the business at startup, any amounts owed to vendors at startup. Add up the total liabilities.
The difference between assets and liabilities is shown on the balance sheet as "Owner's Equity" (for an unincorporated business) or "Retained Earnings" (for a corporation). This amount is your investment in the business.
A Balance Sheet Example: Before and After a Loan
One way to present your balance sheet to a lender is to create two versions to show the financial position of your new business before and after the loan you are requesting.
The first balance sheet shows that the owner has already invested $13,500 into the business, in the form of cash, prepaid insurance, and furniture and fixtures.
Simple Startup Balance Sheet: Before the Loan
|Furniture & Fixtures||$8,000|
|Liabilities & Owner's Equity|
|Loans & Long-Term Liabilities||$0|
|Total Liabilities & Owner's Equity||$13,500|
Simple Startup Balance Sheet: After the Loan
The second balance shows a $50,000 loan, which is being used to buy an inventory of products to sell and to add more furniture and fixtures.
|Furniture & Fixtures||$18,000|
|Liabilities & Owner's Equity|
|Loans & Long-Term Liabilities||$50,000|
|Total Liabilities & Owner's Equity||$63,500|
A review of the balance sheet shows that the owner has contributed $13,500 in equity (mostly in cash and furniture/fixtures) to the startup of the business.
Offsetting the assets are the liabilities and owner's equity. The current (short-term) liabilities of $1,000 might be small debts owed to vendors for some of the office furniture. The long-term liabilities and loans would more likely be for product inventory and furniture.
This balance sheet gives the lender a picture of the position of the business as of the startup date. Preparing a balance sheet is often complicated, and a CPA can help with this exercise.
Startup Balance Sheet vs Profit and Loss Statement
A profit and loss statement (sometimes called an income statement) shows the sales and profit activity in a business over time. was the income and what were the expenses over that time? A balance sheet, on the other hand, is a snapshot of the business financially at a specific point in time. Since the financial picture of a business is ever-changing, both statements are needed to give a complete picture of the financial status of the business.