How to Read a Monthly Balance Sheet (And Why It Matters)

According to financial website The Balance SMB, the monthly balance sheet is “the most important of the three main financial statements used to illustrate the financial health of a business.”

In previous blog posts on this site, we have talked about those 3 key financial statements. If you were stranded on a desert island but still had to run your business, the 3 most important reports you would need are:

  • Monthly Income Statement (or P&L)
  • Monthly Balance Sheet
  • Cash Flow Statement

We did an overview of all three financial statements in this previous blog post. Then we did a post that covers the Monthly Income Statement in more detail. (If you have come across these out of order, we strongly suggest you go back and read the others too. It won’t take you long to catch up!)

Now let’s find out why The Balance SMB calls the Balance Sheet your most important financial statement.

What is a Monthly Balance Sheet? defines a Balance Sheet as: “a financial statement that reports a company’s assets, liabilities and shareholders’ equity.”

In everyday terms, your Monthly Balance Sheet is a snapshot of:

  1. What you own (the assets of your business)
  2. What you owe (the liabilities of your business)

Combining those two factors gives you the “Total Equity” of your company. (The equation at work in creating your Monthly Balance Sheet is simply: Assets = Liabilities + Equity.)

A Balance Sheet can be generated at any point in time that you wish…daily, weekly, monthly, quarterly, annually, etc. However, much like the Income Statement, we recommend creating one every month.

This gives you a frequent enough overview of your financial situation–assets in this case–to keep you on top of things without bogging you down. Any more frequently, and you’ll most likely only get frustrated with all the numbers without gaining any real insights. Let more than a month go by, however, and you run the risk of taking your eye off of the ball too long; you could miss something important.

How to Create a Monthly Balance Sheet

Who it is that is responsible for creating your Balance Sheet is typically determined by the size of your business. Small operations may handle it themselves. As companies grow, they may create the report in-house then have it checked by an outside accounting firm. Larger publicly traded companies, however, are required to be audited entirely by independent third-party firms.

Regardless of which category you fall into (most of our clients are small businesses or nonprofits that regularly use our monthly bookkeeping services to create or review their financial reports), here are the steps to creating a basic Balance Sheet.

1. Decide on the reporting period.

Do you want the report to reflect the last week, month, or quarter? (Most publicly traded companies operate on a quarterly reporting system. However, as we’ve mentioned above, we recommend that small business owners review their numbers monthly for best results.)

Whatever time period you choose, the final day of that period is known as your “reporting date.” For example, if you wanted to create a Balance Sheet for July 2021, it would cover July 1–July 31, and July 31 would be your “reporting date.”

2. Add up your assets.

Assets are listed individually as well as in a total at the end of the report. This allows anyone analyzing your Balance Sheet to easily see not only your total assets but also how they relate to one another.

Assets are divided into two categories:

  • Current Assets – cash, accounts receivable, inventory, and other sources that you could liquidate quickly.
  • Non-Current Assets – property, vehicles, equipment, goodwill (the reputation of your brand), and intangible assets (nationally/globally recognized logo, etc.)

Total those two sub-categories, then combine them to show your Total Assets.

3. Add up your liabilities.

This is done in the same way you handled your assets, except that you’re recording expenses. There are two sub-categories that all of your liabilities fall into:

  • Current Liabilities – accounts payable, debt, expenses, etc.
  • Non-current Liabilities – long-term leases, long-term debt, etc.

Create subtotals for each of those categories, then add them together for Total Liabilities.

4. Determine Shareholder’s Equity.

If your business is privately owned, this is a pretty simple step. It can get more complicated if your business involves publicly traded stocks, though. For most small business owners, however, equity involves common shares and retained earnings.

5. Add Total Liabilities and Shareholders’ Equity, then compare to Total Assets.

As the name “Balance Sheet” implies, these two figures should balance and be the same. If they don’t go back and check your figures since the Balance Sheet formula requires that Assets = Liabilities + Equity.

Add Value to Your Business

One of the best ways to make the most of financial reports–like a Monthly Balance Sheet–is to use them in partnership with a trusted guide. At CRS CPA, we’ve been helping small business owners just like you add real value to their companies with our 40+ years of accounting experience.

Reach out to one of our accounting and business professionals today. We’ll gladly take the time to show you how you can expect more from your CPA and grow your business.

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