How to Prepare and Understand the Balance Sheet for Your Small Business

February 20, 2024
minutes to read
Ben Mensah
Table of Contents

Preparing and understanding the balance sheet is a critical hurdle for successfully running your small business. The balance sheet stands out as a crucial map on the journey of your small business, detailing a comprehensive overview of your financial position with precision. This guide demystifies preparing and understanding the balance sheet and explores how to easily automate financial report generation with Thriday. Join us as we navigate the essentials of assets, liabilities, and equity, providing you with the keys to unlock informed decision-making and strategic financial planning for your business. Let's dive into a world where the Balance Sheet is not just simplified but also an empowering tool to manage your small business better.

What is a Balance Sheet?

A balance sheet is a pivotal financial statement that provides a snapshot of your business's financial position at a specific point in time, encapsulating its assets, liabilities, and equity. It reflects the financial stability and overall health of a business, ensuring that every financial aspect is accounted for and balanced - where the total assets equal the sum of liabilities and equity.

Here's a brief breakdown of the primary components:

  • Assets: These are resources owned by the business, which can be tangible or intangible and are expected to provide future economic benefits. Assets are typically categorised into current (convertible to cash within a year) and non-current.
  • Liabilities: These represent the obligations and debts of the business, categorised into current (due within a year) and non-current liabilities, which are obligations due beyond a year.
  • Equity: Equity, or owner's equity, represents the owner's interest in the business after liabilities are subtracted from assets. It includes invested capital and retained earnings.

The balance sheet is integral for analysing the financial leverage, liquidity, and capital structure of your business, offering rich insights to both yourself and other potential stakeholders about the business's financial standing.

The balance sheet is a detailed representation of the financial components of your business and adheres to the fundamental accounting equation:

  • Assets = Liabilities + Equity

Understanding and creating a balance sheet can be daunting for sole traders or small business owners, which is where Thriday comes into play.

Thriday is a revolutionary all-in-one financial management platform designed to automate the accounting process for your business, ensuring real-time, effortless financial oversight.

Integrated seamlessly with your Thriday business transaction accounts, the platform combines banking* and accounting in one platform and utilises AI to automatically generate all your critical financial documents for you, including a detailed balance sheet, income statement, cash flow statement, tax forecast, and more.

With Thriday, you gain a reliable financial sidekick that ensures your business's financial data is always organised, prepared, and readily available for informed decision-making without the time-consuming financial admin. Learn more about Tireless Transacting with Thriday here.

Thriday balance sheet
Thriday creates and manages the Balance Sheet and other financial reports automatically to keep you updated in real-time

Steps to Prepare a Balance Sheet

Crafting a balance sheet involves detailing a company's assets, liabilities, and shareholders' equity at a specific point in time to provide a snapshot of its financial standing. Here's a step-by-step guide to manually preparing one:

  1. Set the Reporting Date and Period: Choose a specific date, typically the end of the financial year in Australia, to represent your company's financial status through its assets, liabilities, and equity.
  2. List Your Assets: Identify your assets, placing the most liquid ones like cash and inventory at the top and the less liquid ones further down.
  3. Identify Your Liabilities: Detail all liabilities, prioritising them based on their due dates, with imminent ones listed first.
  4. Total Your Assets: Sum up the value of all your assets to compare against the combined total of liabilities and equity, ensuring balance in the sheet.
  5. Total Your Liabilities: Calculate the cumulative total of all liabilities as of the reporting date.
  6. Compute Shareholders' Equity: Determine shareholders' equity by subtracting total liabilities from total assets.
  7. Draft the Balance Sheet: Include a clear header with "Balance Sheet," your company name, and the reporting date. This ensures easy identification and comparison with other financial documents.
  8. Apply the Accounting Equation: Structure the balance sheet adhering to the fundamental equation: Assets = Liabilities + Owner's Equity, segregating each section accordingly.

While these steps offer a manual approach, utilising simple and easy-to-use accounting software like Thriday can automate the process - saving you the time and headache of report preparation.

How to Prepare a Balance Sheet with Thriday

Preparing a Balance Sheet, especially for small business owners, has historically been a complex and time-consuming task. Even in many platforms today, users are required to manually categorise and track transactions, assets, liabilities, and equity to ensure accurate calculations or manage multiple tedious and error-prone integrations like bank feeds. But with Thriday, it's a different story!

Thriday is your one-stop financial management platform, crafted to automate and simplify financial tasks for small business owners. Thriday brings banking* and accounting into the same user-friendly platform to intelligently automate and eliminate financial admin; direct integration with up to 9 business banking accounts* allows your financial transactions to be automatically tracked and categorised with the power of AI. Your business' financial data is then used to automatically generate all the key financial reports your small business needs and keep them continuously updated in real-time as transactions happen, providing you with an instant snapshot of your business's financial status whenever you need it.

With Thriday, there's no need for manual set-up, no complex categorisation, and certainly no need to give up your weekends to number-crunching anymore. Everything is handled by the platform, allowing you to concentrate on what you excel at - steering your business to success.

See how our happy customers leverage Thriday to eliminate their financial admin today.

One of many happy small businesses using Thriday to automate financial report generation and eliminate admin

How Does Thriday Work?

  • Effortless Bank Account Integration: Thriday's intuitive app comes with built-in bank accounts*, ensuring all your transactions, whether incoming or outgoing, are automatically synchronised with Thriday. There's no need to waste time managing shaky bank feed integrations or manual data input.
  • Automated Accounting: Unifying all your transactions on a single platform, Thriday uses the power of AI to automatically reconcile and categorise your transactions, generating all the vital accounting reports your small business needs. Gain easy access to continuously updated financial statements such as cash flow, income statements, balance sheets, tax summaries, and more. Explore the capabilities of Automated Accounting here.
  • Receipt Reconciliation: Scan and save receipts effortlessly with Thriday. Simply take a picture of your receipts, and the platform will automatically reconcile and securely store them, factoring in personalised deductions and guaranteeing they're always easily accessible during tax time.
  • Lightning Lodgment: Stay ahead of all your lodgment timelines with Thriday, which notifies you about upcoming, available, due, and overdue submissions, while also auto-generating the requisite reports for lodging within the platform. Seamlessly submit your BAS to the ATO in mere minutes directly via the app. Dive deeper into BAS and Lightning Lodgment with Thriday here.

Operate your business as usual with your integrated Thriday business transaction accounts, and the app takes care of the rest - automatically reconciling transactions and generating your financial reports, freeing you from financial admin worries!

Thriday all-in-one platform
Thriday is an all-in-one financial management platform designed to automate and eliminate financial admin for small business owners

How to Read Your Balance Sheet

With the right know-how, a balance sheet can be much more than a mere financial report; detailing various accounts and their values and further categorising them, the balance sheet allows for the calculation of ratios that offer a rich source of insight into the liquidity, efficiency, and financial structure of your business.

Let's explore a few pivotal ratios:

Current Ratio

This ratio, derived by dividing your business's current assets by its current liabilities, illuminates your capability to meet short-term obligations. Optimal values typically fall between 1.5 and 2. A high current ratio suggests that your assets aren't being optimally utilised for business development. In contrast, a ratio under 1 indicates you may run into possible issues in addressing short-term liabilities.

Quick Ratio

Also known as the acid-test ratio, the quick ratio assesses your business's ability to satisfy its short-term obligations with its most liquid assets. Calculated as (cash + cash equivalents + short-term investments + current receivables) divided by current liabilities, a ratio of 1 is considered sound, indicating that your business can liquidate assets to meet current liabilities. A ratio below 1 points to potential difficulties in managing liabilities.

Asset Turnover Ratio

This ratio, which compares net sales to average total assets, reveals the efficiency with which your business uses its assets to drive sales. A higher ratio signifies the effective use of assets to generate sales and profit, whereas a lower ratio could indicate issues with management or production efficiency.

Debt-to-Equity Ratio

Calculated as total liabilities divided by owner's equity, the debt-to-equity ratio aids investors and lenders in determining whether to finance your small business. It showcases your ability to produce enough cash flow or profit to handle expenses and reflects your long-term capacity to meet payment obligations and manage debts. A high ratio suggests susceptibility to delays in interest payments or even insolvency.

With easy and instant access to a detailed Balance Sheet and other financial reports for your business that are continuously updated in real-time in the Thriday platform, you can effortlessly calculate the discussed ratios and more to ensure you have a comprehensive understanding of your business's liquidity and financial structure at your fingertips.

Balancing the Books: Your Next Steps with Thriday

Understanding, preparing, and analysing a balance sheet can be daunting, especially for small business owners who already wear many hats. However, managing your financial statements becomes a breeze with a structured approach and the aid of automated platforms like Thriday.

By diving into the various accounts, categorisations, and insightful ratios, you can keep your business financially healthy and pave the way for informed decision-making and strategic planning.

Embrace the ease of automated financial management, reclaim your time and let the power of automated accounting and financial report generation take your financial management to the next level today.

Learn how to prepare and understand the Balance Sheet and how you can automate the process with Thriday!

DISCLAIMER: Team Thrive Pty Ltd ABN 15 637 676 496 (Thriday) is an authorised representative (No.1297601) of Regional Australia Bank ABN 21 087 650 360 AFSL 241167 (Regional Australia Bank). Regional Australia Bank is the issuer of the transaction account and debit card available through Thriday. Any information provided by Thriday is general in nature and does not take into account your personal situation. You should consider whether Thriday is appropriate for you. Team Thrive No 2 Pty Ltd ABN 26 677 263 606 (Thriday Accounting) is a Registered Tax Agent (No.26262416).

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