How Do I Prepare a Balance Sheet for Business Startup?
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, a 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. What profits? What assets?
A lender is looking for some specific information to use in consideration for a startup loan.
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 startup and what will happen before the date the business starts. The profit and loss statement is projected (estimated) for the first year, usually.
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 a specific point in time - at business startup; at the end of a month, a quarter, or a year; or at the end of the business.
A balance sheet is shown in two columns, with assets on the left and liabilities and owner's equity on the right. The total assets must equal total liabilities + total owners equity; that is, the totals must balance. This is called the accounting formula.
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), value of any buildings or land owed.
(Usually accounts receivable are included as an asset, but since the business has not started, there should be no amounts owed to the business).
Show the amount of the total assets on the left side.
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 right side of 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 put $12,500 into the business, for cash, prepaid insurance, and furniture and fixtures.
Simple Startup Balance Sheet - Before the Loan
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.
|Assets||Liabilities and Owner's Equity|
|Cash $3,000||Current Liabilities $1,000|
|Inventory $40,000||Loans and Long-term Liabilities $50,000|
|Prepaid Insurance $2,500|
|Furniture & Fixtures $18,000||Owner's Equity $12,500|
Total Assets $63,500
|Total Liabilities and Owner's Equity $63,500|
An analysis of this balance sheet shows that the owner has contributed $12,500 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 liabilities totally $1,000 are probably some debts owed to vendors for some of the office furniture. The long-term liabilities and loans are probably for the inventory and maybe furniture. Notice how the liabilities and owner's equity are tied to specific items in the asset column.
This balance sheet gives a lender the picture of the position of the business as of the startup date. This is a simplified example. Preparing a balance sheet is complicated, and you may want to get a CPA to help with this exercise.
Startup Balance Sheet vs Profit and Loss Statement
A profit and loss statement shows the activity in a business over time. That is, what 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 a business is ever-changing, both statements are needed to give a complete picture of the financial status of the business.