The balance sheet is a financial report that’s loaded with information, yet often overlooked by business owners who want to know How much money did I make this year? Month? or Quarter? While the income statement often gets the most attention, the balance sheet is where you need to look to truly understand where your business is financially.
So, let’s get to know your balance sheet, which shows where things stand on a specific date. It’s made up of three distinct sections:
This is what your business owns. I often describe these as anything that can be liquidated to cash. Examples of assets include:
- cash in the bank
- inventory not yet sold
- any monies owed to you by your clients or customer
These can be broken up into smaller categories, such as cash/bank, accounts receivable, current assets, and fixed assets.
These are the monies your business owes to others or what needs to be paid off if you liquidated everything from the asset section. Examples of liabilities include:
- business loans
- outstanding bills
- credit card balances
- vehicle or equipment loans
These are further classified as current liabilities and long-term liabilities.
Current Liabilities are things that typically will be paid off within a year, including credit cards balances, outstanding bills and balances to vendors also called accounts payable. Other Current Liabilities include short term loans, payroll and sales taxes collected but not yet remitted, etc.
Long-term Liabilities are things that typically take longer than a year to pay off, including vehicle loans, mortgages, small business loans, etc.
This is what would be left if you liquidated all your assets and paid off all your liabilities. You’ve probably done this in your personal life with a financial planner. Take the money you have, less your bills, and you get your “net worth.”
Often, sole proprietors will ask me where the money they paid themselves is. Unless they are paid through payroll, this is the section where those distributions appear. As a sole proprietor, they are listed under owner’s draws. In a partnership, you’d see partner distribution. Any net income or loss on your profit & loss report also flows into the balance sheet in this section.
The goal is to have your assets exceed your liabilities. This will give you a positive equity position. Another metric that can easily be figured out and tracked through the balance sheet is your business’ current ratio. Take your total current assets and divide them by your total current liabilities. This will show you if your business is in a financial position to pay the debts due the next year. You’re looking for a 1:1 ratio or better.
Understanding the Financial Health of Your Business
Becoming familiar with your balance sheet report as well as your profit & loss/income statement, will allow you to keep a watchful eye on the financial health of your business and be confident in the financial decisions you make to move forward.
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