Review: Balance Sheet

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From the course by Michigan State University

Capstone - Launch Your Own Business!

оценки

Michigan State University

Capstone - Launch Your Own Business!

оценки

Course 6 of 6 in the Specialization How to Start Your Own Business

It is a cliché, but nevertheless very true. Experience is the best teacher. It is also the best confidence builder. It is time for you to take action! The concepts and skills presented throughout the courses in the specialization are applied in this capstone course where you will launch an actual business. It will not be a business concept described on paper, but a functional business with legal status in your particular governmental jurisdiction, developed within your available resources whatever they are, and challenged to generate revenue. One of the greatest benefits of this specialization is the business development environment provided by the population of learners. At the point of the capstone course your thousands of fellow learners become consultants capable of refining and adding value to your business concept, they may also be potential customers or at the very least allow you to observe the likely reactions from potential customers. With the experience of launching this startup, and the execution capabilities and confidence gain from that experience it is our desire that you repeat the process and launch another startup or a bigger version of this startup. Hopefully going on to launch another, and another, and another, evoking another cliché, 'practice will make perfect'.

From the lesson

Establish Your Financial Statements

Learners will be tasked with developing all three of their financial statements for their company. These are not financial projections but rather established templates / ledgers with defined line items for the Income Statement, Balance Sheet and Cash Flow Statement. Note: Learners may find it beneficial to review the lectures on creating financial proforma statements to refresh terminology.

Review: Balance Sheet5:11

Meet the Instructors

Ken Szymusiak
Managing Director, Burgess Institute for Entrepreneurship & Innovation
Broad College of Business
Forrest S. Carter
Associate Professor, Faculty Director of Institute of Entrepreneurship and Innovation
Marketing

[MUSIC]

Welcome to Lesson 3 in our module on financial statements, the balance sheet.

As a reminder in Lesson 2, we walked through the basic terminology and

structure of the income statement or what it's often called, profit and

loss statement.

During this lesson, we'll be working in a similar format.

As with the income statement, the balance sheet can also be summarized in a simple

equation that highlights the structure of the document.

This equation is assets are equal to liabilities plus owner's equity.

Unlike income statements, which have many alternative names,

the balance sheet is quite literal in its definition.

The underlying premise is the statement must balance.

Meaning that assets are always equal to liabilities plus owner's equity.

Note that you will often hear owner's equity referred to as shareholder equity.

We're avoiding this terminology because our assumption is that your business is

quite small at this time and likely, the only owner of your business is yourself or

perhaps some friends and

family members that have provided some investment capital.

The terms are interchangeable but if you have issued shares of stock or have gone

public, you'll need to consider accounting for different types of shareholders,

which is much more complicated than we'll be covering in this lesson.

However, don't let this stop you from researching these types of details to

get a deeper understanding of the topic matter.

Let's get started in building out an example to bring this document to life.

Here's a basic layout for a balance sheet.

On the left-hand side, you will see a column for assets.

On the right, you will see liabilities and owner's equity.

I think this type of layout is illustrative

in showing you the balance of numbers as they are populated.

To kick things off, we'll begin populating the assets column of our balance sheet.

Assets fall into two categories, current and fixed.

Current assets are those that can be easily converted to cash or

liquidated and fixed assets are those that are not as easily liquidated.

Some good examples of current assets are cash,

which is clearly a liquid asset, accounts receivable,

which are payments that you're waiting to receive from customers and

inventory which are goods you're planning to sell in the near future.

Some examples of fixed assets would be those items not easily liquidated

such as real estate, machinery and equipment, and furniture and fixtures.

All of these would fit this category.

For the purposes of demonstrating the format of the balance sheet,

I've inserted some hypothetical figures in each category.

Now let's move on the topic of liabilities.

Liability are financial obligations owed to those outside of the company.

Similar to assets, liability are divided in to two distinct categories.

Current, meaning those obligations that are due in a time period of one year or

less and long-term, which is a status given to those obligations that are owed

at a point past the one year time horizon.

Some examples of current liabilities that are typical for

a small business are accounts payable or money owed to vendors and suppliers.

Credit card debt or another form of short-term debt note and

the interest owed on a long-term debt such as a mortgage.

Long-term liabilities would often include examples like

the mortgage principle on real estate, bank notes for equipment purchases.

Other items could include interest owed such as a convertible debt financing

instrument, which we'll cover later in this module.

Now that we have calculated our liabilities,

we'll move on to the last category which is owner's equity.

Now, we need to address owner's equity,

which is the balancing component of our formula.

Think of it this way, at this point in time, we own 465,000 worth of assets in

our hypothetical company we've created and we've incurred liabilities of $217,800.

Could this be possible?

How can we buy that many assets but only incurring that much in liabilities?

The answer is no.

How did we get these assets?

The answer is we had to pay the balance with investment money,

also known as equity.

The reality is that most of us will start a business with only our own cash, which

is why we're not diving into the depths of the topic of shareholder's equity.

In the example provided here, we have a line for equity paid by the owner,

as well as a line item for equity paid by an investor, most likely a close friend or

family member, in this case.

Now we can close out our balance sheet exercise to confirm, in fact,

that the numbers do balance.

The balance sheet on its own may not seem like that powerful of the tool but

I assure it is.

One, it provides a picture of the financial structure of the company.

Two, it can also provide a feel for the financial health of the company.

One big use for ratio that can be extracted from the balance sheet is

the company's dept to equity ratio.

This ratio can indicate whether a company maybe at risk due to borrowing

too much capital to operate.

And thirdly, the balance sheet also provides some insights into the liquid

value of the company.

Which is often helpful for

investors and lenders because they tend to get an understanding

of what assets are worth in case of bankruptcy or a company restructuring.

As with the income statement,

the balance sheet is another tool that really only becomes

real as you build your own or explore the examples available to you on the web.

So, get exploring, keep learning about the topic but

most importantly, start building your own right now.

We'll see you in Lesson 4, where we'll the topic of cash flow.

[MUSIC]

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