The balance sheet can be the single most frustrating thing for a business owner. If you are having trouble with your balance sheet my first suggestion is to hire an accountant. My second suggestion is to use Quickbooks which automatically generates your balance sheet so that you don’t have to worry about it. But there are many early stage companies and a little bit less sophisticated small businesses that aren’t using Quickbooks yet, and can’t afford a CPA. So if you are just using an Excel spreadsheet, or a piece of paper and pencil to do your accounting and someone asks you for a balance sheet, do not fret, you can create your own balance sheet.
But you will undoubtedly run into problems. Your balance sheet won’t balance. So now I just wanted to give you 4 things to look for if your balance sheet is not balancing.
1. Paid in Capital – Before I jump in to Paid in Capital mistakes, I just wanted to make sure that you understand the basics of a balance sheet. At the end of the day, in order for your balance sheet to balance, you need your Assets to equal your Liabilities plus your Owner’s Equity. Paid in capital is an owner’s equity account. The definition of paid in capital is “the capital contributed to a corporation by investors through purchase of stock from the corporation.” For most small businesses Paid in Capital is the amount of cash you personally invested in the business to get it started. You may have had other investors as well when you started, their investment plus your investment should be the total of Paid in Capital.
2. Loan Amortization Mistakes – Another common mistake for companies that have loans is to screw up the breakdown between principal and interest amounts for loan payments. A common mistake is to reduce your loan balance on the balance sheet by your monthly payment amount. Don’t forget that only a portion of each loan payment will go toward the principal on the loan! The rest will go to interest. Your interest will only show up on your income statement and cash flow statement, not the balance sheet.
3. Change in Inventory – Another common mistake that impacts the balance sheet is a change in inventory. You would think that it should be pretty simple. It is easy to determine how much inventory you have right now because you can just go make a physical count, but if you are working on a set of financial projections you will need to project future inventory amounts, and this will impact your balance sheet each month. The trick is that a change in inventory also impacts your cash flow statement, you actually have to take last month’s inventory and subtract this month’s inventory and then reduce your cash balance by that amount. Yes, it really is tricky that is why a good CPA is worth their wages.
4. Retained Earnings – Retained earnings is kind of a catch all. Retained earnings is supposed to be the sum of all your net income or net loss from the day you started your business. So if you were doing things right from the beginning you should be able to calculate retained earnings, but what I often see with small businesses is that they don’t have all the data needed to calculate retained earnings, so they just use Retained Earnings as a plug number. They make retained earnings whatever it needs to be in order for the balance sheet to balance. I am not suggesting that you do this, but just know that it is not an uncommon practice.
My suggestion, don’t waste another minute trying to figure out how to balance your balance sheet if it is not working. Hire an accountant, learn to use Quickbooks, or use ProjectionHub if that can meet your current needs. I have wasted many, many hours wrestling with a balance sheet, and I have a background in accounting. I hope this post either cleared some things up for you, or helped you make the decision to stop wasting your time and to call in a professional. Good luck!