A business’s balance sheet shows the financial picture at some specific time, like at the end of the last day of the month or the end of the last day of the year. The financial picture is a matter of assets, liabilities, and capital. Through the magic of double-entry bookkeeping, your financial transactions are recorded in a way that ensures the balance sheet will indeed balance if the entries are correct.

The Law of Balance

Assets are always equal to the sum of capital and liabilities. Your books have to show that.

So let’s make sure first that you know what’s what. Some definitions are in order. These are three terms you should know in order to create a blanace sheet:

Assets. Cash, accounts receivable, inventory, land, buildings, vehicles, furniture, and other things the company owns are assets. Assets can usually be sold to somebody else. One definition is “anything with monetary value that a business owns.”
Liabilities. Debts, notes payable, accounts payable, amounts of money owed to be paid back.
Capital (also called equity). Ownership, stock, investment, retained earnings. Actually there’s an iron-clad and never-broken rule of accounting: Assets = Liabilities + Capital. That means you can subtract liabilities from assets to calculate capital.

Estimating the Balance

If you do it right, once you set your starting balances, you can use your cash flow assumptions to calculate the rest of the balance sheet.The idea is that you have educated guesses already for sales, costs, and expenses. You can use assumptions for sales on credit and payment days and collection days and inventory management to calculate these balances. Then use assumptions for debt and new investment to keep the cash flow accurate. The balance comes automatically.Read on, I’ll show you that in the rest of this section.

This is planning, not accounting. That’s one of the primary principles of the plan-as-you-go business plan. To make a powerful and useful cash flow projection you need to summarize and aggregate the rows of the balance sheet. Resist the temptation to break it down into detail the way you would with a tax report after the fact. This is a tool to help you forecast your cash.

Sample Balance Sheet