Why Small Business Owners Need A Personal Financial Statement, And How To Create One

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Jun. 10 2024, Published 8:10 a.m. ET

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Running a small business is exhilarating, demanding and often a blur of financial uncertainty. While most entrepreneurs focus on their business’s bottom line and keep their financial statements current, they often neglect to document their personal finances. That’s wrong. Every small business owner needs to create a personal financial statement (PFS), which serves as a personal balance sheet, documenting your assets, liabilities and net worth. 

When do you need a personal financial statement?

Many small business owners may need a loan or other outside financing as they grow their companies. That usually requires providing a lot of documentation to the lender. But lenders don’t only want to see your business finances. Most require a personal financial statement as well.

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If you decide to pledge personal assets as collateral, lenders definitely want to know the details about those assets. Financial institutions may wish to conduct a fiscal health evaluation of your personal finances so they can assess how well you manage money. For instance, if you have few assets and a lot of outstanding debt, it can indicate you would have trouble repaying a loan.

Are you thinking of buying an existing business or a franchise? The business owner, broker and/or franchisor will ask for a PFS as evidence that you’re financially able to purchase the business or franchise.

If you plan to rent a commercial office, retail space, or other types of business space, the landlord will likely request a personal financial statement before approving your lease.

As you can see, there are numerous reasons you need a PFS. It’s smart to prepare yours now (and keep it updated) so it will be ready when needed.

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Personal financial statements are financial snapshots offering numerous benefits.

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Beyond simply tracking your assets and liabilities, a PFS offers several vital benefits for entrepreneurs. Creating your PFS is like getting a checkup, except the result is a fiscal health evaluation rather than a physical one.

Some of the benefits of preparing a personal financial statement (sometimes called a personal financial summary):

  •  Securing funding: As we already noted, when seeking loans for business expansion, new equipment or company vehicles, lenders rely on your PFS to assess your creditworthiness and ability to repay. A strong PFS significantly increases your chances of securing favorable loan terms and interest rates.
  • Understanding your net worth: Your PFS provides a clear picture of your overall financial standing, including your assets (cash, investments, property) and liabilities (debt, loans, mortgages). Seeing a comprehensive view helps you make informed decisions about investments, savings goals and risk management.
  • Making prudent financial decisions: With a clear understanding of your income, expenses and debt obligations, you can make informed choices about spending, investments and financial planning. Your PFS empowers you to avoid impulsive decisions and build a solid financial foundation.
  • Monitoring progress and adapting: Regularly reviewing your PFS allows you to track your progress toward your financial goals and identify areas for improvement. This ongoing review process enables you to pivot, adapt, and adjust your strategies as your business and personal circumstances evolve.
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What’s included in a personal financial statement?

A typical PFS is divided into two main sections—assets and liabilities.

List of assets

  • Current Assets include cash, checking and savings accounts, certificates of deposit, short-term investments and accounts receivable.
  • Investment Assets include stocks, bonds, mutual funds and retirement accounts (IRAs, 401(k)s).
  • Fixed Assets include real estate holdings and personal property, such as jewelry, cars and other items of significant value (art collection, first editions of books, etc.)

List of liabilities

  • Current Liabilities include credit card debt, outstanding bills and short-term loans.
  • Long-term Liabilities include mortgages, car loans, student loans and personal loans.

Do not include business assets or liabilities in your personal financial statement.

Creating Your Financial Snapshot

You don’t need to be a financial wizard to create a PFS. Here’s how:

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  1. Gather your documents: Collect bank statements, investment account statements, loan documents and receipts for major purchases.
  2. Choose a format: You can use an online template, spreadsheet or pen and paper. Choose the best format for you and ensure consistency for future updates.
  3. List your assets: Identify and value all your assets using current market values for investments and real estate.
  4. List your liabilities: Include all your debts, noting the remaining balances and interest rates.
  5. Calculate your net worth: Subtract your total liabilities from your assets to determine your net worth. While this is part of your overall personal balance sheet, you should keep this calculation as a separate net worth statement.
  6. Review and update regularly: Your PFS is not static. Update it regularly, ideally quarterly, to reflect changes in your financial situation.

When creating your personal financial statement, it’s critical to be honest and accurate. This wealth assessment is for your own benefit to help you (and lenders) make informed decisions. No one is judging you.

A PFS helps you take ownership of your personal finances and equips you with the knowledge and confidence to navigate the challenges and reap the rewards of entrepreneurship. A healthy business rests on a solid personal financial foundation.

If navigating financial statements feels overwhelming, consider consulting with a financial advisor, accountant or SCORE mentor.

This article originally appeared on Score.

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By: Score

Since 1964, SCORE has helped more than 10 million aspiring entrepreneurs. Each year, SCORE’s 10,000 volunteer business experts provide 350,000+ free small business mentoring sessions, workshops and educational services to clients in 300 chapters nationwide. In 2016, SCORE volunteers provided 2.2+ million hours to help create more than 55,000 small businesses and 130,000 jobs. For more information about starting or operating a small business, visit SCORE at Follow @SCOREMentors on Facebook and Twitter for the latest small business news and updates.

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