Keeping track of the financial position of your business is prudent for any small business owner or self-employed person. As well as monitoring income and expenditure it is useful to understand how much equity there is in the business. This is normally captured in a balance sheet
The balance sheet is a statement, which summarises the equity position of a business. So, if all the assets were sold at a market value and all liabilities (debts) repaid how much cash would be left in the business. The balance sheet is not an ongoing record, moreover it is a summary at a specific point in time, often referred to as a snapshot. As such, a balance sheet will usually include the date at which the information was captured, for example ‘Balance Sheet as at 31st December, 2014’. In this example the information would be reflective of the financial position of the business at the end of that day once all previous transactions had been completed.
The balance sheet is an integral aspect of limited company accounts for reporting purposes however dependent on your business you may choose to process a balance sheet as a sole trader or partnership as well.
How does a balance sheet work?
A typical balance sheet will be split into three sections: assets, liabilities and shareholder capital. This type of statement is called a balance sheet as it balances the value of the assets owned by the business against its total volume of liabilities plus shareholder capital. In short, total assets = total liabilities + shareholder capital. In order for the statement to be valid these figures must match or balance.
Who would be interested in the sheet?
The business owner or sole trader would certainly be interested in the balance sheet. As the balance sheet is recorded each year at the same date it allows them to see quickly whether or not the overall value of the business is consistently growing. Furthermore it also helps to identify how solvent the business is. This means that if all the assets were to be sold would they repay the total amount of outstanding debt in the business. If not then the shareholders of the company could be trading unlawfully.
Accountants would also be interested in the sheet. The balance sheet may hold clues to where and how a company might raise cash quickly if it so required. An accountant would be able to identify any challenges in the balance sheet and advise accordingly.
Bankers and investors would also be interested in the sheet. As a sole trader a loan or bank credit may be something you require at some point down the line. Banks and investors may well request the last three years sheets in order to assess business performance and make a decision on whether or not it’s a credit-worthy investment. A review of the company’s liquidity will help to answer this.
Finally of course, as part of the statutory requirements of any limited company or limited liability partnership HMRC and Companies House will require copies of these statements annually alongside an income statement. As a sole trader, you won’t have a legal requirement to produce balance sheets, but they can still be an incredibly useful business tool.
For more help with self-employment, visit our Quickbooks Self-Employed page.