A balance sheet is a financial accounting document used to state a company’s current assets, liabilities, and equity. A business should have a balance sheet available in order to show potential investors and shareholders the current financial state of their company. Balance sheets should be updated regularly to reflect the current financial state of the business.
There are two sides to the balance sheet: one will have assets, and one will have liabilities. These two sides should even out for a business to be successful. Each account should be listed separately. The company only needs to list their current assets and liabilities for the particular time period.
Balance sheets will vary depending on the type of business. Accountants are typically best suited to complete and present an accurate balance sheet.
If you're a small business owner, you'll need to learn how to put a balance sheet together. Good news - creating one is not difficult and is absolutely free. You can easily create a balance sheet in Microsoft Excel, or Numbers if you are Mac user. Essentially, balance sheets allow you and your shareholders to assess your business' financial status. This article gives you everything you need to draw up a balance sheet template, which you can then fill in with the pertinent information. A balance sheet form consists of three major components.
Balance sheets provide an accurate record of a business’ financial status. As long as the company’s balance sheet is up to date, it can provide an accurate snapshot of the company's financial state. Many business owners will generate an income statement to calculate their profit margin and will look at their account transactions, or recent financial statements to ensure the health of their business. However, creating a balance sheet is the best way to accurately calculate any profit/loss margins for your business, as well as ensuring you’ve properly been paid.
We get it. When you own a business, large or small, you’ve got a million other things going on, and spending extra time to create a balance sheet seems like an unnecessary and tedious task that you’d just fine without. However, the invested time is sure to pay off. By creating an accurate balance sheet, you may find that your company is in a different financial status than you may have originally thought
Below are the basic components of a balance sheet, as well as relevant examples to give you a visual of what yours should look like. You can use the information and examples below and input them into your Excel template, or other any other balance sheet spreadsheet you may be using.
This section includes anything that generates revenue for your business, such as real estate, cash, equipment, and inventory. You should list your assets in two categories - current assets and noncurrent assets. These are pretty self-explanatory - current assets are assets you expect to use within a year (12 months), such as inventory that you regularly restock. All longer-term assets, such as equipment, company cars, and real estate, fall under the umbrella of non-current assets.
Similar to how assets illustrate financial influx, liabilities reflect outflow and debts your business accrues. Be sure to list total liabilities that are both current (relevant within 12 months) and non-current. Current liabilities generally include short-term loans, purchases, and accounts payable, whereas non-current liabilities are things like long-term loans and mortgages.
The traditional balance sheet formula is important because it helps businesses and shareholders better understand the company’s overall financial health. To acquire assets, businesses must have money to purchase them. Of course, credit is also an option. For many businesses, getting the money to purchase required assets either comes from a loan or from shareholder equity. Taking out a loan or even a line of credit is a liability because it must be paid back. Shareholder equity is money that is invested by shareholders. When the business generates revenue that exceeds their total amount of liabilities, the additional revenue is placed into the shareholder equity account.
Assets, Liabilities & Shareholders’ Equity
How a Balance Sheet is used in Financial Analysis & Modeling
A balance sheet is an important document that is compiled to determine the financial health of a business. It allows shareholders to understand the company’s assets compared to its liabilities. It also shows what the company has total after liabilities and shareholder equity is subtracted from assets.
The Limits of a Balance Sheet
One of the limits of determining the financial health of a business using a balance sheet is that it only showcases financial information for a specific amount of time. It can be difficult to get a full picture of financial health for a business based off just one limited time period. Another limitation of balance sheets is actually in how accounting takes place in a business. It is possible for businesses to manipulate the numbers to make the information seem better than it really is.
This final section of your balance sheet reflects the difference between your business' liabilities and assets, also known as owner's equity - in short, what you end up with at the end of the day. It is also known as capital, member's funds or shareholder's equity. When calculating your equity, be sure to factor in assets you yourself have contributed to the business (" capital ",) as well as reinvested profits (known as "retained earnings" or "accumulated losses") and profits set aside for business maintenance, (emergency funds, etc).
What Other Documents Do I Need Along With a Balance Sheet?
Two important documents, in addition to the balance sheet, that aid business owners are the income statement and the cash flow statement. These two documents, when paired with the balance sheet provide a clearer “big picture” of the company’s health, and offer a more accurate, in-depth synopsis of company finances, and in-turn, help owners make sound financial decisions.
A cash flow statement essentially transforms the company ledger and assigns cash inflows and outflows into the following categories:
A company’s cash flow can be calculated with this formula:
(Beginning cash balance) plus or minus (cash inflows and outflows for the month) equals (ending cash balance). It should also be noted that if your numbers are accurate, the ending cash balance will be the same number on your balance sheet.
The income statement is like a close cousin to the balance sheet. The income statement is a very straightforward report on a business’ cash generating power. For example, if a business earned a 15% profit on $100,000 in sales for the month, the income statement will show they earned a $15,000 profit. When a business owner completes his balance sheet, this month’s income statement will be included in the company’s total equity balance.
Financial analysis is a step used by many business owners to help calculate their “bottom line”. In other words, it helps business owners calculate their financial situation, and how much it costs them to keep their doors open. In a way, financial analysis exposes the business’ most basic needs, and can also help owners free up extra money each month.
Sometimes, the figure that a company profits each month can be deceiving. Owners may be dazzled that their business profits $1.5 million each month, but that figure is little consolation if they don’t see that it costs them $3 million per month to keep their doors open. Operating expenses need to be paid in cash, regardless if it's up front, or paid at a later date.
Let's take Lisa for example, who owns a clothing company. Lisa’s company generates a 12% profit for every dollar sold. That may sound like a respectable profit, but that means that 88% of every dollar sold pays an expense. $100,000 in sales for the month means $88,000 of that money goes to various expenses. Financial analysis can help Lisa determine her current financial position and as well as aid her in generating more cash every month to pay her expenses more easily. This also helps her reinvest money into her business with the assets she saves. Two common categories that can be adjusted to free up cash each month are: Inventory, and Accounts Receivable.
Inventory can be a large expense. Many businesses like Lisa’s rely on inventory to keep sales up. Being out of stock when demand is high only drives customers to go elsewhere, causing sales to drop and Lisa's business to lose money. However, if financial analysis shows that Lisa’s inventory is eating too much of her monthly cash, she can look into other options. If Lisa partners with her suppliers and finds that they can ship smaller quantities of merchandise to her, and expedite the shipping, she can carry less inventory and still meet customer demands--all while saving money each month.
Accounts receivable is money owed to Lisa by her clients. Lisa’s company offers custom attire in addition to items she sells in-store. Sometimes, projects may take weeks to complete. Though Lisa knows her customer will pay once the garment is complete, that money may be weeks away. One way Lisa can increase her cash flow is to offer a discount if customers pay upfront, or if she requires them to pay a deposit up front.
Taking steps to cut back on expenses that rob business owners of cash (such as accounts receivable and inventory) make it easier for business owners to manage their company and cover their expenses.
Though a balance sheet, in addition to its related forms, may seem like a tedious task that only adds to a business owner’s to-do list, it’s a time investment that greatly pays off. With the benefits that accompany creating and maintaining a balance sheet, business owners can be better equipped when making decisions on behalf of their company. With the information and examples in this article, we hope that you have all the tools you need to make an accurate balance sheet, as well as financially analyze your company to potentially free up extra money.
According to the Federal Reserve of New York, as of 2017, borrowing in the US is on the rise. This includes auto, home and credit card loans. The NY Fed found that consumer household debt rose to nearly $13 trillion in the first quarter of 2017. Student loans comprise more than 10% of that sum, meaning Americans currently hold over $1 trillion in student loans.
This guide, therefore, offers a comprehensive review of American household debt, focusing on student loans, household and credit card debt. We cover the causes of debt, key terms to know regarding debt, how to avoid it and how to pay it off. We hope this guide gives you the requisite tools to navigate college and beyond with a detailed understanding of how debt works so you can minimize the amount you take on and pay it off most efficiently.
There are many reasons folks find themselves in debt, many of them unavoidable. However, there are a number of common behaviors that drive debt that should be avoided. Those include:
According to the Federal Reserve’s Board of Governors, in 2016 the total outstanding federal and private student loans totaled $1.4 trillion. Furthermore, the Pew Research Center found that by 2010, 19% of all US households held outstanding student debt. Even worse, 40% of those borrowers were younger than thirty-five.
In 2017, according to the New York Federal Reserve, the average student loan debt for a borrower after graduation is $34,000.
The dangers of defaulting: A default remains on your credit report for seven years and can therefore significantly hurt your ability to rent a home, sign up for a cell phone plan, etc. In addition, those who default cannot lower monthly payments, take out any additional loans, may have their wages and tax refunds garnished, and so forth. Lastly, while you cannot be sentenced to jail for failing to repay a loan, if you are sued by the lender and lose, you can be arrested for not complying with the courts’ summons.
How to avoid default: Here are some important tips to help you prevent default.
Other important terms:
A key way to make sure you’ll avoid default down the road is to have responsible money habits in place before you take out a loan. Those habits include:
Understanding the most important elements of your personal finance
The goal, of course, is to avoid unwanted debt. However, the financial challenges of life often make this impossible. The amount of money you owe should inform your strategy for repayment. You may decide to pay off debts from smallest to biggest, therefore eliminating interest as quickly as possible. You may, on the other hand, prioritize repayment by interest rate, focusing on the highest rate debt first. Or, you may try to consolidate all of your debt onto a single credit card with a lower interest rate.
Regardless, if you are forced to take on debt, it is important you make a plan to get out of it. Here’s our most important step to get started: Eliminate all unnecessary expenses from a monthly budget.
There are many online resources that can assist you in calculating the amount of debt you will need to take on to attend a particular college. Here’s one we like, in part, because it includes federal student loan considerations:
Proactive and financially responsible students often get a head start repaying student loans while they are still in college. Strategies for doing so include:
Many recent graduates struggle with whether to throw as much money as possible at their student loans or invest some of that cash elsewhere. There are benefits to both strategies.
To determine which makes more sense for you, assess the amount of after-tax interest you pay on your debt and compare that to the after-tax rate of return you expect to earn on investments.
Generally, if the return you earn (after taxes) from your investments is greater than the after tax interest rate expense on your debt, it makes more sense to invest than to allocate the extra money to debt payments.
With that in mind, paying off debt first comes with other benefits, including minimizing your tax bill, more protection for your retirement assets, and a shorter timeline to debt-free living.
The latter, for many, is more valuable than whatever small percentage difference you might earn through investing the extra money.
Here are our essential tips for paying off student loan debt:
Student loan debt significantly impacts the housing prospects of those in debt. One study found that nearly one in four borrowers took two years longer than those without student loans to move out of their family home. Furthermore, the same study found that 83% of non-homeowners cited student loan debts a major factor barring them from homeownership, and 63% stated that if they had no student loan debt they would use the money they pay towards student loans each month towards purchasing a home.
If you have student loans and are considering purchasing a home, recent changes at Fannie Mae, the largest purchaser, and guarantor of mortgages in the US, affect potential borrowers in several ways:
Though these changes should make it easier to qualify for a mortgage, young people with student loans should still consider the following before jumping into homeownership:
If the answer to any of these questions is “no”, consider waiting until you can answer each of these in the affirmative before purchasing.
While it is not impossible to get approved for a mortgage when you have student loans, student loan payments can affect the approval process because your payment history comprises 35% of your total credit score. Therefore, if you fall behind on payments, your credit score will drop and hurt your prospects for mortgage approval. Furthermore, student loans negatively impact your debt to income ratio, a key calculus in the mortgage approval process. Therefore, if you have loans and your income is relatively low, it will be difficult to gain approval. Furthermore, if you are currently struggling to make your loan payments, you should consider how you will save for a down payment and pay a mortgage.
Check out our home loan debt section for a more detailed discussion of home equity. Once you have done so, remember this: taking out home equity loans to pay back student loans a bad idea for multiple reasons:
According to a 2017 study by the National Association of Realtors, US homeownership rates are at their lowest rate in nearly 50 years. However, household debt is still on the rise. Therefore, it is important that homeowners, especially first time buyers, avoid common mistakes people make that often increase their debt.
While it may seem obvious that the sooner you pay off your mortgage the better, there are pros and cons to paying off your mortgage early, especially for young owners.
Home equity refers to the difference between your home’s value and the amount you paid for it. If your home is worth more than you paid for it, the difference equals your home equity.
Home equity loans and home equity lines of credit are the two types of home equity debt. They are often referred to collectively as “second mortgages.”
Home equity loan: Home equity loans function just like a mortgage. A buyer borrows a lump sum and then repays it in even monthly payments over a fixed-period at a fixed-rate.
A Home Equity Line of Credit (HELOC): Homeowners borrow money as needed during the “draw period”--typically ten years--and pay either minimum, interest only, payments or larger balances--variable interest.
Think twice before you offer your home as collateral for a loan. If you fail to repay your loan, you risk losing your house. Moreover, if you sell your home, you will have to pay off your mortgage AND any additional home equity loans before you can transfer title to the new buyer.
Depending on how you file, you will have to wait a certain amount of time before you are eligible for mortgage loans.
Buying a Home after Foreclosure: If you lose your home to foreclosure, you typically face a waiting period longer than bankruptcy--seven ears for a conventional mortgage and two to three years for a VA or FHA mortgage.
Foreclosure and Bankruptcy: If both apply to you, you will have to coordinate even more variables and seasoning periods associated with each event.
If you do have to file for bankruptcy It is imperative you use the wait periods to rebuild your credit in order to increase your chances of acquiring loans in the future.
Depending on where you live and the value of your home, the GOP tax bill may have a significant effect on your 2018 tax obligation.
Here is a brief overview of changes (see our Surviving Tax Reform for Homeowners Guide for a more in depth look).
According to the Federal Reserve, America’s credit card debt hit an all-time high in November 2017. Credit card delinquencies also rose over the last year, up to 7.5% from 7%.
A study by Lending Tree found that 42% of respondents cannot pay off their credit card debt because they do not make enough money. Furthermore, 29% cannot pay debt taken out for car repairs, and 27% cannot repay medical bills.
The penalties for credit card delinquency vary by the length of non-payment.
Your payment history is an essential party part of your credit score calculus. Therefore, outstanding credit card debt can negatively impact your score even if you make regular payments on time each month. To determine this, credit agencies use your “revolving utilization ratio,” which tabulates the relationship between your credit balances and limits.
Credit card debt should be avoided at all costs. Here are just a few of the problems that come with credit card debt:
Because of their generally high interest rates, shrewd borrowers should look for ways to lower their interest rates. Here are a few tips for doing so:
Here are our essential tips for paying off credit card debt.
As mentioned above, it’s important you have enough in savings to cover emergencies. If you have more than that already put away, consider using some of that extra cash to pay off debts. If you do not have enough in savings to put any towards debt, you should stop using credit cards altogether and focus on paying them off.
While advertisements for debt consolidation plans online, on television and on the radio are often enticing, BE CAUTIOUS! In general, these programs charge a large fee each month which actually makes it significantly harder to pay off your debt.
Which should you prioritize? The answer depends on a host of factors, including:
According to the Demos National Survey on Credit Card Debt and the AARP Public Policy institute, 2012 was the first year in which households headed by people over fifty years old held more debt than households headed by people under fifty.
Why is this the case?
What can seniors do?
Millennials are graduating from college with astronomical student-loan debts which can, therefore, make them vulnerable to credit card debt. It is therefore important that millennials keep the following in mind:
There you have it. Debt is a complicated enigma that should be avoided at all cost. With that in mind, it is unlikely you will be able to go through life without having to take on some debt, be it through school, home ownership or credit cards. The key to managing debt is to manage it wisely and avoid the variety of pitfalls that drive you deeper and deeper into debt that can seriously harm your financial future. We hope this guide helps you manage your own debt responsibly.
Our team at FormSwift wanted to determine how many times America’s household debt could be paid for with the amount of money the government has committed to cover the 2008 bank bailouts - including money the government paid for the initial crash ($7 billion), has committed to entirely ($16.8 trillion), and has paid towards that commitment so far ($4.6 trillion). Based on the 2017 approximation of total household debt in the US for student loans, home loans, and credit card debt, we determined how many times over American household debt could be eliminated.
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