If you're not dealing with shareholders, you may not have had spent much time with balance sheets, but they help you to determine if your business is turning a profit. Still, not all businesses on the pathway to success have a large net profits. There's a whole lot that startups have to pay for – from repaying bank loans to buying new equipment and renting space before you even make your first dime. For this reason, you may want to tout your net sales in order to attract potential investors who are feeling shy because your company hasn't yet made the big bucks. Net sales determine if customers actually want what you're selling, and this information can be estimated with your balance sheet.
What Is A Balance Sheet?
Balance sheets don't show distinct sales numbers. They show your assets, liabilities and equity. Assets, which are depicted on one side, include the actual cash you have on hand. Liabilities, which are on the other side along with shareholders' equity, depict bank loans and long-term debt. Balance sheets rely on a simple equation: assets = liabilities + shareholders' equity. It makes sense when you think about it this way: companies have to pay for their assets. This is either done by taking on liabilities, for example, getting a bank loan, or from investor cash, which is your shareholder's equity.
These numbers are closely linked on a balance sheet. If you take out a bank loan, it's moved into assets but also reflected in liabilities. Only when your revenue is larger than your liabilities do shareholders get more value added to their equity.
Know Your Assets
To figure out your net sales on a balance sheet, you're going to have to look at your assets. There are two kinds of assets that companies have: long-term and current assets. Long-term assets include equipment and land. They're not what we're looking for, here. Current assets include cash, inventory and accounts receivable. Accounts receivable is the money your company is owed via invoices rather than credit card or cash sales. This is the number we're searching for.
Estimating Your Net Sales With A Balance Sheet
An income statement is a whole lot more accurate for figuring out your net sales because it has each sale recorded. Nonetheless, you may only have a balance sheet in front of you and can still get a pretty good idea. Check out the cash and accounts receivable balances for the month. Add these up and subtract them from the previous month's sum. This is your estimated net sales. For example, your sheet shows $100 in cash and $200 in accounts receivable one month. The previous month, it showed $10 in cash and $100 in accounts receivable. By this equation, you had $190 in net sales for the month.
This isn't a foolproof method because it assumes that all of your current assets came in through sales transactions while ignoring the fact that bank loans also become cash assets as soon as they're acquired. Make sure you account for any inventory purchased, which lowers your cash assets, or loans acquired, which inflates the number of cash assets regardless of sales, in the period you're examining. This should give you a more accurate number.
- Credit card or debit card sales are recorded as cash sales. Invoiced sales are recorded under accounts receivable.
- The accounts receivable amounts are typically net of allowance for doubtful accounts. This allowance reflects management's estimate, based on historical or industrial averages, of the portion of the accounts receivable balance unlikely to be collected.
- You can also estimate net sales for the most recent 12-month period by comparing the current month's totals to the same month in the prior year. For longer periods, however, it becomes difficult to assume that sales transactions were the sole contributors to changes in cash balances.
- The terms "sales" and "income" are often used instead of "revenue."
Mariel Loveland is a small business owner, content strategist and writer from New Jersey. Throughout her career, she's worked with numerous startups creating content to help small business owners bridge the gap between technology and sales. Her work has been featured in publications like Business Insider and Vice.