Two financial statements are used by financial institutions to evaluate a company's loan application, the Income Statement and the Balance Sheet.
The Income Statement shows the sales (incoming revenues) and expenses over a set period of time. This statement is a good indicator of the profitability of a business during a particular period, as it shows the net result when the sales of the business are put against its expenses. The Balance Sheet, on the other hand, shows the business assets, liabilities and shareholder capital on a specific date, and as a result gives a good picture of a company's financial position.
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Assets are anything with commercial value that your business owns. They are divided into three categories: current assets, fixed assets, and other assets.
Current assets are cash, accounts receivable, inventory, and other assets that will likely be turned into cash, bartered, exchanged, or converted into an expense within a year during the normal course of business. Included in the “other current assets” category are loans to shareholders, also known as due to shareholders.
Some business owners will not pay themselves a salary, preferring to take drawings, which they must deal with at year-end. In the current assets section, due to shareholder amounts may artificially inflate current assets if you plan to convert them to bonuses, dividends or management fees at year-end, at which time they become expenses of the business.
Fixed assets have commercial value but are not expected to be consumed or converted into cash in the normal course of business. They are long-term, more permanent or "fixed" items, such as land, building, equipment, fixtures, furniture, and leasehold improvements.
Fixed assets often decrease in value (depreciate) over time due to wear and tear from use. The federal government allows businesses to depreciate items for tax purposes, and it has defined specific depreciation rates for different categories of fixed assets. On your balance sheet, therefore, you will see the initial value of the asset, the amount of accumulated depreciation, and finally the net depreciated value of the asset.
Example of a fixed asset on the balance sheet:
|Accum Deprec - Vehicle||$||-8,500|
* Net depreciated value of the vehicle.
Other assets are things that don't fit into either of the above two categories, yet still belong on the balance sheet. They include things like prepaid expenses, which have value but are not fixed or necessarily to be converted into cash value during the current business year.
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Liabilities are company debts or obligations to outside parties as a result of goods or services that were transferred to your company on a specific date that has already passed. Current liabilities are the portion of those obligations that are to be paid out during the course of the year, while long-term liabilities are the portion of your company's obligations that extend beyond that timeframe.
Current liabilities include accounts payable, accumulated taxes and payroll liabilities, and the current amount owing on business loans and/or leases.
Long-term liabilities, meanwhile, include the balance of your loans, leases, and other liabilities beyond the current calendar year.
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While Intangible Assets do not appear directly on your balance sheet, they can be a significant factor when one looks to buy or sell a business or part of the business. Intangible assets include things like good will; intellectual property such as copyrights, trademarks, patents; leases; franchises; permits and so on.
While you do not list these assets on your balance sheet, they are reflected in the sense that they enable you to maintain profit margins and market share, so in turn they show up on the current assets section of your balance sheet through the revenue and profits they create.
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Something that is often difficult for new entrepreneurs to grasp is the way equity is calculated on the balance sheet, where the total assets always equal the total liabilities plus equity.
In other words, your company's equity is equal to the value of its total assets minus its total liabilities. If the business assets are greater than the liabilities, which is hopefully the case, then the equity of the business is the positive difference between the two numbers.
Sample equity calculation:
On Company ABC's Balance Sheet, the Total Assets are $100,000, while the Total Liabilities are $40,000. In this case, the difference between the assets and liabilities is $60,000. Since equity is equal to this difference, the equity of Company ABC at that time is $60,000.
If Company ABC had Total Liabilities of $50,000, with its Total Assets staying at $100,000, then the equity of Company ABC at that time would be $50,000. The increase in the total liabilities of the company in comparison to its total assets causes the equity of the business to drop.
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Hard to believe the day is actually here. After 18 months of hard work, dozens of meetings, many late nights and hundreds of hours of collaborations, Project Wildfire is about to launch.
All the pieces are in place: the website is up, the launch party is booked, the funding is in place, the mentors are ready... All we need now is your passion and your dreams.
The project came about through the founders' belief that while the private sector can't solve all of the world's most pressing problems, the world's most pressing problems can't be solved without the private sector. We believe that business can and should be a force for good in the world, and that by transforming the way business is done we can change the world.
Around the world, social business or social enterprise is changing the rules of the game. No longer strictly focused on the financial bottom line, social businesses are putting mission first - and making a profit while doing it.
We look forward to seeing the amazing ideas that will come about during the contest.
May you always live your dreams.
Mike Brcic, director,
If you're still working on your Project Wildfire pitch and want some tips and feedback, come on out to our pitch workshop this Thursday!
As we shake hands celebrating our new partnership, we know it will succeed. Yet, as half of all marriages fail, are the odds of a business partnership success any different? Just as we enter in to a marriage contract to share our lives; do we not have the same expectations of our business partnership?
In our society, with a fifty- percent divorce rate, it is wise to think of pre-nuptial agreements. Yet, before the ceremony, many of us hesitate to ask for a contract as such a request suggests the lack of trust. Nevertheless, we do it. And, half of us are glad we did.
I believe all business partnerships need a pre-nuptial agreement. Such relationships can be complex with such thorny issues as: How do you share the workload? How do you split the profits? Do you have similar goals? What happens if the business fails? And if it does go sour- it can be as painful as divorce with similar feelings of anger, disappoint injustice, and deception.
In the business world, some think a handshake is a macho and romantic way of doing business. While such arrangements are great theater, in real life they are stupid and risky. Just as in marriage, misunderstandings are common. Are you aware that success may create more problems than failure? Money affects our behavior. Do you know how you will react to making or losing it?
Thus, if you are going into business with a partner-before you open the doors, get a written agreement. And, if you are in business, perhaps it is not too late to sit down with your partner and draft an agreement. Here are four major points that I advise you to include:
It is my experience, that once an agreement is in place, everyone feels better. You will have removed much of the possibility of unpleasant surprises from a relationship of loose ends to one of definition with a specific understanding of your relationship to each other.
Although, contracts and agreements may work to protect our interests, we can learn from Aristotle, who saw harmonious relationships as critical to well being. He concluded that successful partnerships are a basis of living well. Let me leave you with: Who you select to be in business with is as important as selecting the business to be in.
In this episode of StartmeUp Videos, Dr. Steven Gedeon talks about the challenges of writing a business plan as well as the best practices for writing different sections of the business plan, how should you write the financial section, executive summery, how to create a marketing plan etc How to start a business ? How to write a business plan for a small business ? How to complete the executive summery ? What is a business model? Where should I start ? is it simple ? How to prepare a business plan proposal Need a free Business plan Guide ? http://www.StartMeUpRyerson.com
In this episode of StartmeUp Videos, Dr. Steven Gedeon talks about the challenges of writing a business plan as well as the best practices for writing different sections of the business plan, how should you write the financial section, executive summery, how to create a marketing plan and much more.
How to start a business ? How to write a business plan for a small business ? How to complete the executive summery ? What is a business model? Where should I start ? is it simple ? How to prepare a business plan proposal
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