Balance Sheet 101: What It Is and Why You Can’t Ignore It

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Hey boutique owner! Today I’m here to give you a little Balance Sheet 101. The Balance Sheet is one of the primary financial statements for a business, but unfortunately it is often ignored.  

Every business owner is at least somewhat familiar with the income statement and how it shows your income & expenses. But, what’s the purpose of the balance sheet, and why does it matter? Let’s dive in and take a look together!

Balance Sheet 101: What is it?

The  balance sheet is going to show you a snapshot of the financial health of your business. Just like an actual photo, it captures a specific moment (date)  in time, and it reports these 3 key areas:

1. 1. Your Assets: What you own in your business. This will include things like all the money in your bank account(s) and payment processor accounts, the inventory you have on hand, and any significant display materials or equipment you might own.
   2. Your Liabilities: What you owe in your business. This will include outstanding credit card balances, loan balances, and even the sales tax that you’ve collected from your customers that you owe to the appropriate state agencies.
   3. Your Equity: Essentially, what’s left over, or your “walking away” money. If you were to walk away from your business today and sell all your assets at cost, use that money to pay off all your liabilities, this is what you’d be left with. 

The balance sheet can help you answer specific questions such as, “How much cash do I have in my bank accounts & payment processors?”, “How much do I still owe on my startup loan?” and “How much inventory do I have on hand?”

It lays all of these things out on one report so you can see how your business stands. You can also easily run this report as of certain dates, so you can easily compare all of these numbers to a previous period. 

Do you have more cash in the bank now than you did 3 months ago? Are you making progress on paying down your credit card debt over the last 6 months? Is your boutique growing in value? Your balance sheet will be able to easily tell you these things!

Balance Sheet 101: Why you shouldn’t ignore it

The balance sheet should be reviewed every month, along with your other financial reports, because it can help you track your growth as a business. Over time, if your assets (what you own) are growing, and/or your liabilities (what you owe) are shrinking, that’s a great sign! This helps you measure the strength and health of your business beyond what your sales numbers say.

The balance sheet is also important if you ever want to apply for a business loan or attract investors. They’ll want to see this snapshot of your business, and if you’re able to meet your current debt obligations first. 

I dive a little deeper on The Important of the Balance Sheet in this post if you want to learn even more about it!

How to Read Your Balance Sheet

I’ve often said that your bookkeeping is like a puzzle, and all the numbers fit together perfectly. The balance sheet is a great example of that, because a balance sheet must “balance”. There’s a formula that’s reflected in your balance sheet:

Assets = Liabilities + Equity

The good news is, if you use a software such as Quickbooks Online to help manage your bookkeeping, it’ll make sure that your balance sheet is always in balance! If you’re doing things manually or in a spreadsheet, this is a good way to make sure that your balance sheet is accurate.