The balance sheet is one of the three main financial statements, along with the income statement and statement of cash flows, that show your company’s financial health. Unlike the statement of cash flows and income statement, which cover a period of time, the balance sheet is unique in showing the value of your company in a moment of 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 is important to understand how much revenue they are generating with the best possible estimates of your MRR and ARR. It is also important to track the contracts to minimize churn and prevent dunning.
Baremetrics brings you metrics, dunning, engagement tools, and customer insights. You can use Baremetrics to pull metrics out of your business, and then input those numbers directly into your balance sheet. Some of the things Baremetrics monitors are MRR, ARR, LTV, the total number of customers, total expenses, quick ratio, and more.
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What is a balance sheet?
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 balances (as well as all your journals) 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:
- Errors in currency exchange rates
- Errors in inventory
- Incomplete or misplaced data
- Incorrectly entered transactions
- Miscalculated equity
- Miscalculated amortization or depreciation
How is the balance sheet structured?
While the prototypical balance sheet, as mentioned above, is split into a left side and a 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 more similar to the other financial documents and therefore easier to read, even if you need to keep “ALE” in your mind to see the balancing.
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”.
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What’s on the balance sheet?
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.
1. Current assets
Current assets include basically everything that is currently cash or will be turned into cash within a year.
Cash and Cash Equivalents: The first part is pretty straightforward. Cash can be anything from notes in your petty cash to the balance of your checking account. Cash equivalents are those items that can be turned into cash immediately, such as marketable securities (bonds and stocks).
Accounts Receivable: This is one of two items that only appear on the balance sheet under the accrual accounting system and not the cash accounting system. Accounts receivable includes the revenue that your company has recognized but not yet collected. As you receive payments for the services you’ve already provided, this account will decrease while your cash account will increase.
Inventory: Inventory includes all supplies on hand to produce products for sale as well as the products ready to be sold. Many SaaS businesses have zero inventory.
2. Fixed assets
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 assets.
Plant, Property, and Equipment (PP&E): PP&E is a catch-all term for the company’s tangible fixed assets. The line item is noted net of accumulated depreciation. Some companies will separate PP&E into its various components, such as buildings, land, and equipment.
Intangible Assets: Intangible assets are marketable things of value that cannot be touched. They can include patents, technology, licenses, contracts, and brands.
3. Current liabilities
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.
Accounts Payable: Along with accounts receivable, accounts payable are only used in the accrual accounting system. These are expenses that have been incurred but not yet paid for, such as the utility bill sitting on your desk or invoiced services that you do not need to pay immediately.
Current Debt/Notes Payable: These are the debts you need to pay completely within a year.
Current Portion of Long-Term Debt: Some companies separate out the part of long-term debt that needs to be paid within the following year. For example, your mortgage might be 25 years long, but the current portion includes all the payments you’ll make over the next year.
Deferred Revenue: Counterintuitively, if you have collected money for services that have not yet been rendered, this is a liability because you owe the client for those services.
4. Long-term liabilities
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 into your business, instead of selling a stake in your company, you may have sold bonds.
Bonds Payable: This account includes the amortized amount of bonds the company has issued.
Long-Term Debt: This is any other debt that you owe and will not be paid off within the next year. Mortgages are a common form of long-term debt.
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.
Capital: This is everything put into the company by the founders as well as any venture capitalists.
Retained Earnings: This is the profit that the company has not paid out as dividends.
Treasury Stock: Instead of retaining earnings as cash in the company, it might decide to buy treasury stocks to bolster its share price.
Why Is a Balance Sheet Important?
The balance sheet is important because it can give you specific information about the company’s financial health.
For example, by comparing the equity and liabilities, you can see if the company is over-leveraged, that is 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 amount 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 towards 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.
For this last point, there is no need to calculate these metrics alone. Baremetrics can monitor your SaaS quick ratio for you.
Integrating this innovative tool can make financial analysis seamless for your SaaS company, and you can start a free trial today.
How are balance sheets unique for SaaS?
While the look and feel of a balance sheet doesn’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. A really 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.
Example of a balance sheet
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 actually $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.
Balance Sheet for 12/31/2021 (in thousands)
LIABILITIES AND EQUITY
Cash and equivalents
Total current assets
Total current liabilities
Total fixed assets
Total liabilities and equity
Baremetrics can help you draft your balance sheet by tracking the value of your contracts. It can help you collect on 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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