The balance sheet is one of three main financial statements, along with the income statement and statement of cash flows. These statements are critical, as they show your company’s financial health.
Unlike the statement of cash flows and income statement, which cover a specific period, the balance sheet is unique in that it shows the value of your company at a moment in time.
The balance sheet includes your assets, liabilities, and owner’s equity. While liabilities are the amount the company currently owes to customers, suppliers, or banks, equity is the portion of the company owned by the investors. Assets are all the things of value possessed by the company, whether financed by liabilities or equity.
In the case of a SaaS business, your most valuable assets are the contracts you have with your clients and the platform they use.
Speaking of your users, it’s important to understand how much revenue they are generating based on the best possible estimates of your MRR and ARR. It is also important to track the contracts to minimize churn and prevent dunning.
A balance sheet is usually divided into a left side and a right side. On the left side, you have assets. On the right side, you have liabilities and equity. The left side must equal the right side (hence the name balance). This leads to perhaps the most fundamental equation in accounting:
Assets = Liabilities + Equity (ALE)
or, if you don’t drink alcohol you might prefer,
Assets = Liabilities + Owner’s Equity (ALOE)
Whichever abbreviation you prefer, this equation must balance. Before switching from your day-to-day bookkeeping work to the end-of-period financial statement drafting, you should double-check that this equation and your journals balance with a trial balance.
If you do find yourself with an “imbalance sheet” (no, accountants don’t call it that, but they might chuckle if you do), some of the main culprits are the following:
Related: What is GAAP Accounting?
The balance sheet is important because it can give you specific information about your company’s financial health.
For example, by comparing the equity and liabilities, you can see if the company is over-leveraged. In other words, you can see if the debts are dangerously high.
It can also give you a view of the efficiency of the company by showing you how much retained earnings have been generated relative to the number of assets.
Perhaps most important of all, it can give you an understanding of the liquidity of the company. By calculating the quick ratio, you can see immediately whether the company is moving toward a cash crunch.
In addition, if the accounts receivable, and especially the written-off amount as bad debts, are getting out of hand, then you know the company is unable to collect what it is owed from customers.
While the prototypical balance sheet, as mentioned above, is split into a left and right side, the reality is that a random landscape page in a company’s prospectus is not visually appealing.
For this reason, often the left side is placed above the right side so that, from top to bottom, the balance sheet lists the assets, then liabilities, and finally equity. This makes it look similar to the other financial documents and therefore easier to read, even if you need to keep “ALE” in your mind to see the balance.
As with all other financial statements, there are many nested categories on the balance sheet. Within assets, there are current and fixed assets. Similarly, there are current and long-term liabilities. There are also different types of equity, even if they amount to “what the owners own”.
Also Read: How to Prepare Financial Statements for Investors
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Let’s take a closer look at the items on the balance sheet. Some of these items have far bigger meanings in SaaS than elsewhere, while others will hardly appear at all.
Current assets include everything that is currently cash or will be turned into cash within a year.
Fixed assets include all the assets that will not be turned into cash within a year. These are typically items that are used to operate your business over the long term.
While SaaS businesses that are trying to bootstrap their way to profitability may not typically have many tangible fixed assets, they certainly will have intangible assets. In fact, for a SaaS business, intangible assets are probably the most valuable.
Current liabilities are the debts you owe that must be paid within the next year. For a SaaS business, the deferred revenue category is particularly important.
Bonus: Learn about billings to better understand cash and profitability.
Long-term liabilities are pretty self-explanatory. These are debts that you do not need to pay off within the next year. For example, if you have sought outside investment in your business, instead of selling a stake in your company, you may have sold bonds.
This is everything owned by the investors. This includes the initial investments by the founders, additional investments by venture capitalists, and any retained earnings the company has managed to generate.
While the look and feel of a balance sheet don’t change much in the SaaS paradigm, the specifics do.
As mentioned above, you are likely to see some items balloon in value, especially accounts receivable, deferred revenue, and intangible assets. Conversely, you are likely to have far less in the way of property or equipment, especially if you are outsourcing any server needs.
You’ll also need to monitor this information differently. High deferred revenue isn’t a problem so long as you are confident in your ability to render those services when due. Similarly, large accounts receivable values are fine so long as you aren’t eventually writing off a large portion as uncollectible.
Baremetrics can help you keep your accounts receivable in check with its dunning tools.
Let’s look at the example balance sheet below. At the top, we can see that the balance sheet was made on December 31st, 2021, for ABC Corporation. We can also see that it is reported in thousands (so the 5,000 in cash and equivalents is $5,000,000).
The company has $6,300,000 in current liabilities, which is higher than the $6,000,000 in current assets, but since most of those liabilities are in the form of deferred revenue, the quick ratio isn’t too concerning.
The intangibles have a very high value, which might indicate a lot of value or that the company is representing itself as more valuable than it is in reality. It is hard to say, but with retained earnings of $4,500,000, it might be true, especially if it only took a year or two to reach so much added equity.
ABC Corporation |
||||
Balance Sheet for 12/31/2021 (in thousands) |
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ASSETS |
LIABILITIES AND EQUITY |
|||
Current Assets |
Liabilities |
|||
Cash and equivalents |
5,000 |
|||
Accounts receivable |
1,000 |
Current liabilities |
||
Accounts payable |
300 |
|||
Total current assets |
6,000 |
Deferred revenue |
6,000 |
|
Fixed assets |
Total current liabilities |
6,300 |
||
Equipment |
100 |
|||
Intangibles |
30,000 |
Long-term Debt |
10,000 |
|
Total fixed assets |
30,100 |
Total liabilities |
16,600 |
|
Equity |
||||
Shareholders’ capital |
15,000 |
|||
Retained earnings |
4,500 |
|||
Total equity |
19,500 |
|||
Total assets |
36,100 |
Total liabilities and equity |
36,100 |
Check Out: What Are T Accounts and Why Do You Need Them?
Baremetrics can help you draft your balance sheet by tracking the value of your contracts. It can help you collect your accounts receivable by improving your dunning process. It can also show you the nature of your contracts to calculate your deferred revenue.
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