A common requirement when working on financing is the statement of net worth which is also known as the balance sheet. In its simplest form, the balance sheet shows what assets you own compared to the debt you have. Being able to write out your statement of net worth is an important step in the business planning process as it will allow you to take stock.
The main sections of the balance sheet are the assets and the liabilities, both current and long-term. Another term for net worth is shareholder’s equity. The general formula will always be:
Assets = Liabilities plus Equity or Assets less Liabilities = Net Worth
The easiest way to set up a balance sheet is on a spreadsheet. Since the statement of net worth is set at a specific time, it will change as you buy and sell capital assets.
I could bore you with the technical definition of an asset but in short, an asset is generally any of these things:
- Land (Property)
- Buildings, manufacturing sites (Plant)
- Machinery, tools, vehicles and equipment
It is important to record these items at their purchase price and not the price someone would pay you for them now, unless it is a depreciable asset like a car. If you have an active business, you can find the net book value of your property, plant and equipment on Schedule 8 (Capital Asset Schedule) of the tax return. If you are writing out the statement of net worth for yourself, make sure you indicate that you are using fair market value if that is what you use.
Other assets you should list will include receivables, which is the amount of money someone else owes you that you still expect to collect. If you loaned money to your younger sister in high school and she never paid you back, do not include this, as it’s unlikely she’ll ever pay you.
If you have any deposits, inventory, co-operative shares or prepaid expenses, you can list those as well. These have a value and potential you could turn them into cash. A good way to think about an asset is anything you legally own that you could sell for cash. Typically household furnishings and personal items are not included when looking at assets from a business perspective.
The next section is the liabilities. These will include any amounts outstanding that you owe to others. When you are writing out your liabilities you should include the following:
- Credit card balances
- Lines of credit
- Any outstanding bill
Basically, whatever dollar amount you owe someone, whether that is a bank or anyone else, gets reported as a liability on the balance sheet. You should also include any amounts outstanding to any government agencies including sales tax payable if you already have a business. Sales tax that you collect on your sales is not revenue and needs to be tracked because you will have to remitted at some point.
If you have taken advanced payment on any sales, this amount is also a liability under deferred revenue. This would only be the case if you already had an active business.
Ideally your assets should be greater than your liabilities. This difference is called your equity or net worth. You always want to see a positive net worth, a negative net worth will spell disaster. There are situations where this will happen but when applying for financing, it is best when your net worth is greater than zero.
Now that we have the definitions out of the way, I’ll include a sample set of numbers to give you an idea of a basic balance sheet:
- Bank balance – $5,000
- TFSA – $45,000
- Car – $4,000
- Credit Card – $1,500
- Utility bill – $300
In this example, the bank, TFSA and car are the assets totalling $54,000. The liabilities are the credit card and bills which total to $1,800. In this situation, the person’s net worth is $52,200.
I hope this quick guide helps you next time you might need to fill out a statement of net worth or a balance sheet.