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124: Understanding Your Balance Sheet Whether You Are Starting A Business Or Side Hustle


124: Understanding Your Balance Sheet Whether You Are Starting A Business Or Side Hustle, A Solopreneur, Entrepreneur, Mompreneur, Freelancer, Bookkeeper, Virtual Assistant, Business Owner, Or Self-Employed

As a business owner, you’ve more than likely heard about how important it is to review your financial statements. When most business owners think about their financial statements, they think about their income statement or their profit and loss report. It’s essential to keep an eye on this report, but what you may be missing is how critical it is to your business to keep an eye on your balance sheet as well. Your balance sheet and your income statement go hand in hand. In today’s podcast episode, I’m diving into the balance sheet so that you can understand what it tells you about your business and why it is so important to make sure that your balance sheet is accurate before having your tax return prepared. Whether you are starting a business or side hustle, you’re a self-employed individual, a solopreneur, entrepreneur, mompreneur, freelancer, small business owner, a remote, virtual, online, or in-house bookkeeper, or a virtual assistant or VA, taking the time to understand how to read and interpret your balance sheet will help you make smart business decisions and build your confidence along the way. These tips are essential whether you are using a computerized software system like QuickBooks, Xero, Wave, or FreshBooks for your business finances; or doing your bookkeeping manually with an Excel spreadsheet or even a Google Document…


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Show Notes:


As a business owner, you’ve more than likely heard about how important it is to review your financial statements. When most business owners think about their financial statements, they think about their income statement or their profit and loss report. It’s essential to keep an eye on this report, but what you may be missing is how critical it is to your business to keep an eye on your balance sheet as well. Your balance sheet and your income statement go hand in hand. In today’s podcast episode, I’m diving into the balance sheet so that you can understand what it tells you about your business and why it is so important to make sure that your balance sheet is accurate before having your tax return prepared. Whether you are starting a business or side hustle, you’re a self-employed individual, a solopreneur, entrepreneur, mompreneur, freelancer, small business owner, a remote, virtual, online, or in-house bookkeeper, or a virtual assistant or VA, taking the time to understand how to read and interpret your balance sheet will help you make smart business decisions and build your confidence along the way. These tips are essential whether you are using a computerized software system like QuickBooks, Xero, Wave, or FreshBooks for your business finances; or doing your bookkeeping manually with an Excel spreadsheet or even a Google Document…


Welcome Back…If I asked you to give me a copy of your financial statements as of the end of last year so that I could prepare your tax return, what would you think I wanted? If you are thinking that I am asking for a copy of your balance sheet and your income statement, you’d be correct. Now, would you be able to generate a set of these financial statements for me pretty easily? If your answer is no, I suggest you implement a system so that your bookkeeping is up to date and you can view these financial statements at any time of the year and know that you can rely on this accurate and timely information. This is a perfect topic for another podcast episode, but for today, I’ll stick to the balance sheet. The next question I want to ask you is when you generate these financial statements, which include the balance sheet and your income statement, do you know what each report tells you about your business? The majority of business owners understand their income statement. They look at it more consistently because they want to keep a pulse on their sales and their expenses. But when it comes to your balance sheet, many don’t understand what their balance sheet means or what each number represents, and there are quite a few business owners who never even look at their balance sheet. If this is you, it’s okay, but starting today, you can make a change. My goal for this podcast is to help you understand what your balance sheet tells you about your business and why it is so important to make sure that the numbers on your balance sheet are correct so that when you have your tax return prepared, you know you are reporting accurate information.


Your balance sheet gives you the big picture of how your business is doing. It is like a snapshot in time or a particular date when you can see the exact information about many areas of your business. It shows you how much money you have, how much you owe to others, and your business net worth. If you are using a computerized accounting system to track your business finances, such as QuickBooks, you will be able to generate a balance sheet directly from this software. Many other computerized software solutions will also have the option to generate this report, so if you haven’t already looked at your balance sheet, I would recommend generating one using the current date and start making sure that each item listed on your balance sheet is accurate.


So, let’s start with what is listed on your balance sheet. Your balance sheet is broken down into three sections. Just three sections, so that shouldn’t be too overwhelming, right? It starts with your Assets. Your asset section lists everything that your business owns. In this section, you will see accounts such as your cash, checking account, savings account, investments, fixed assets, accounts receivable, and inventory. The following section is your liabilities. This section lists what your business owes to others. In this section, you will see accounts such as accounts payable, credit cards payable, payroll taxes payable, sales tax payable, lines of credit, or loans and notes payable. The last section of your balance sheet is your equity section. This is what is left over after you subtract your liabilities from your assets or what you owe what you own. In this section of your balance sheet, depending on your entity type, you’ll see accounts such as your contributions, distributions, draw account, and net income or net loss. The net income area is where your income statement feeds into your balance sheet. This is why I say that your balance sheet and your income statement go hand in hand. Your income statement gives the details of your net income or net loss for your business, and that number flows into your balance sheet in the equity section. The simple formula for the balance sheet is that your assets equal your liabilities plus your equity. One of the most popular questions I get from business owners is how to record money taken out of their business for personal reasons. When you have a transaction you need to record like this, you will use the draw account. This account shows up on your balance sheet, reflecting personal funds taken out of the business. It does not show up on your income statement since it was never a business purpose transaction and should not impact your net income or net loss.


When you are looking at your balance sheet, it is a good idea to compare your balance sheet to another point in time to see how your business is doing. For example, you could look at your balance sheet as of today’s date and compare it to last year at this same time. When you do this, you can look at your cash accounts to see if they have gone up or down to get a feel of how your cash is doing from this same time last year. You can do the same with any loans you have outstanding. Do you have more overall debt this year compared to the previous year? If so, do you understand why? Your balance sheet is also important for situations when you may want to get additional financing. Lenders will want to look at your balance sheet to see how your business is doing before lending additional funds to you. Also, if you are looking at investors for your business, they will want to see your financial statements, including your balance sheet, so they can see how healthy your business is prior to investing.


Now that you understand the basics of your balance sheet, I want to help you understand the implications and why it is so important to ensure the accuracy of each item on your balance sheet. To give you a few examples, I’ll start out with your checking account. One way to ensure your checking account amount is accurate on your balance sheet is to do your bank reconciliations. Let’s say you didn’t do your bank reconciliations, and throughout the year, your bank charged you a fifty-dollar-a-month service charge. You may have never recorded this amount in your books, and if you didn’t reconcile your bank account, this may have been missed throughout the year. Fifty dollars for twelve months is six hundred dollars. If this were recorded correctly, your income statement would reflect the six hundred dollar bank service charge expense, and this would lower your taxable net income amount. If it was never recorded, you would be paying tax on an additional six hundred dollars. Another example would be if you had an outstanding loan. If you didn’t verify that the year-end loan principal balance was correct, you might not have your interest expense recorded correctly on your income statement. This, again, could cause your net income to be higher if you don’t have any interest reflected in your income statement, and again, you could be paying taxes on additional income that you don’t need to pay tax on. These are just two examples of many that could be happening in your business if you are not making sure that your balance sheet is reflecting accurate information. If you are working with a tax preparer, they should be contacting you to make sure that each of these accounts is accurate so that your income statement is correct as well and that your tax return will be prepared using this accurate information.


If you are just taking a look at your balance sheet for the first time, and you are unsure if the numbers that your business is reflecting are accurate, you may want to talk to your tax preparer, accountant, or bookkeeper to have them walk you through each account by doing a deeper dive so that you have a complete understanding of what is going on in your business. This is just one way you can build even more confidence in yourself and your business. If you find that you have areas in your business that you are unsure about, situations that are holding you back in your business, or when it comes to Mastering Your Small Business Finances, I’m here to help. Your potential is limitless, and you are capable of anything you put your mind to. I listen to my clients, give them personal attention, help them move outside their comfort zone, move their dreams into a reality, help with feelings of frustration, anxiousness, worry, or unsatisfaction. My clients are ready to try new ideas and take risks. When you work with me, you no longer feel lonely or isolated in your business. You’ll notice less conflict with yourself and your relationships, you’ll develop more self-confidence, less procrastination, disappointment, and you’ll have more abundance and an overall well-being in your life. Your struggles are easier to handle, you feel happier, positive, and supported, and your quality of life is much greater. Hiring a coach like me in your business or your personal life is one of the best decisions you can make. So, ask yourself, are you missing a coach in your business or your personal life? If so, one of my goals for this year is to help as many people as I can to experience what it is like to coach with me. I am opening up additional time in my calendar, and I’m welcoming you to try a coaching session with me. I know many of you have no idea what it is like to have a coaching session or how valuable a coaching session can be for you, so I’m taking away any fear you may have by creating an opportunity for you to grow as a business owner. You have the opportunity to dip your toes in and see how you like coaching with an affordable introductory coaching session. I want you to see the potential possibilities you have with coaching. If you are ready to grab one of these sessions, you can go to www.FinancialAdventure.com/intro and secure your introductory coaching session today, where I’ll spend the whole time coaching you on anything you’d like coaching on in your business or personal life. I’ll post the link where you are listening to this podcast. I’m looking forward to working with you soon and helping you see the possibility and benefits of coaching.

And, you know I’m going to ask…what’s at least one thing you will take away from this episode that will help your business succeed and grow your bottom line? If you need some accountability, join our PRIVATE Facebook community and post your action item, we’d love to support you.

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