Financials 101 for Startups – Part II: The Balance Sheet

Share Button

balance-sheetThe purpose of the balance sheet is to give, at a point in time,  a picture of the financial position of a company. It has three components: assets, liabilities, and equity.

  • Assets are items that will provide a future benefit to the company, either through use of the item (for example, a prepaid computer maintenance contract or a computer hardware item) or through collection (for example, cash collected on an accounts receivable balance). Assets are listed on the balance sheet in order of liquidation (the order in which the assets will be used/collected) and include a subtotal for current assets (those that will be used/collected within 12 months of the balance sheet date).
  • Liabilities represent obligations that the company must pay in the future. They are listed on the balance sheet in the order that they will become due and include a subtotal for current liabilities (those that will be due within 12 months of the balance sheet date).
  • Equity represents the net worth the stockholders have in the company. It is always equal to assets less liabilities. Equity can include common stock, preferred stock, and/or treasury stock, all of which are denoted by shares that represent a piece of ownership of the company. Stock is listed on the balance sheet in order of liquidation preference, which is the order in which the owners of each stock type would receive their investment back if the company were to liquidate. Equity may also include stock options and warrants that have been granted.

Sounds simple enough, right?  Not so fast.  Sometimes it can be difficult to determine if a warrant is equity or a liability for GAAP purposes (e.g., if convertible debt is part liability and part equity, if preferred stock is actually a liability, etc.).  Confused?  Why should a startup or early stage entrepreneur care?  A future post will discuss this more.

The balance sheet can provide insight into the health of the company. For example, a current ratio, which is calculated as current assets divided by current liabilities, greater than one (1) indicates that the company has the ability to pay its obligations on time. Additionally, by dividing current liabilities by equity, one can assess the extent to which the company is leveraged. A higher leverage ratio may indicate the company will struggle to repay debt with the current level of stockholder investment.

For more information on how you can use your financial statements to more effectively manage your business, please contact your Aronson advisor or Danielle Meyer at 301.231.6200.

 

About the Author: Danielle Meyer is a manager in Aronson LLC’s Technology Industry Services Group, where she provides comprehensive audit and accounting services to a diverse group of companies operating in the high tech, biotechnology/life sciences, e-commerce and software sectors. 

About Danielle Meyer

Danielle Meyer has written 4 post in this blog.

Danielle Meyer is a manager in Aronson LLC’s Technology Industry Services Group, where she provides comprehensive audit and accounting services to a diverse group of companies operating in the high tech, biotechnology/life sciences, e-commerce and software sectors

View Archives

Blog Authors

Latest Webinar Videos