18: The Balance Sheet ~ Treat Your Financial Statements Like A Report Card And Consistently Measure
18: The Balance Sheet:Treat Your Financial Statements Like A Report Card And Consistently Measure Your Progress, Whether You Are A Solopreneur, Entrepreneur, Small Business Owner, You’re A Virtual Online Bookkeeper Or Are A Virtual Assistant Or VA
Today we are talking about report cards. If you have a child in school…or maybe they are distance learning, you know you need to keep tabs on how they are doing, right? Well, when you own a business, it’s a lot like having a child. How many times have you heard someone refer to their business as their “baby”? I hear it a lot, and yet, when we think about how that baby is doing, there are a lot of business owners who don’t even look at their baby’s report card. Are you asking, “What report card?” If you knew your business had a report card, would you be looking at it on a consistent basis? Sure, you would. What if I told you there is a report card you can look at that gives you an enormous amount of information about how your business – or “baby” is doing. That report card…well, it’s your financial statements. There are two reports that I strongly recommend you take a look at…even if it is just once a month. If you are using a software like QuickBooks to record your bookkeeping, it is easy to pull up these reports. In today’s episode, I am going to walk you through the first of these two reports and what it is actually telling you about your business. Is your business getting straight A’s, or is it consistently getting Ds or even worse, Fs? If you are not looking at these reports, you will more than likely not know if you are in the A range or the F range, and without this information…are you able to make good business decisions? Not really. Are you a solopreneur, entrepreneur, small business owner, bookkeeper or virtual assistant? If so, listen in and find out how you can learn more about how your “baby” is doing by understanding how to read and measure your financial statements…
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Show Notes:
Today we are talking about report cards. If you have a child in school…or maybe they are distance learning, you know you need to keep tabs on how they are doing, right? Well, when you own a business, it’s a lot like having a child. How many times have you heard someone refer to their business as their “baby”? I hear it a lot, and yet, when we think about how that baby is doing, there are a lot of business owners who don’t even look at their baby’s report card. Are you asking, “What report card?” If you knew your business had a report card, would you be looking at it on a consistent basis? Sure, you would. What if I told you there is a report card you can look at that gives you an enormous amount of information about how your business – or “baby” is doing. That report card…well, it’s your financial statements. There are two reports that I strongly recommend you take a look at…even if it is just once a month. In today’s episode, I am going to walk you through the first of these two reports and what it is actually telling you about your business. Is your business getting straight A’s, or is it consistently getting Ds or even worse, Fs? If you are not looking at these reports, you will more than likely not know if you are in the A range or the F range, and without this information…are you able to make good business decisions? Not really. Are you a solopreneur, entrepreneur, small business owner, bookkeeper or virtual assistant? If so, listen in and find out how you can learn more about how your “baby” is doing by understanding how to read and measure your financial statements…
Welcome Back…It happens so often. I’ll be talking with a client and they understand bits and pieces of their business or their financial statements, but unless you take a look at the whole picture you will never fully understand how your business is doing.
I hear clients say they have their income statement ready for their tax preparation and when I ask them if they are comfortable with their balance sheet, they say they have never even looked at it…or even worse, their tax preparer isn’t looking at it either.
Like I mentioned in the introduction, your financial statements are like looking at your business’s report card. Today we are going to dive into the first of the two financial reports I feel are super important for you to understand. The two financial reports are your balance sheet and your income statement – or your profit and loss report.
We’re starting with the balance sheet. This report is a “snapshot” in time of how your business is doing. Your balance sheet will list all your assets or what you own, your liabilities or what you owe, and your equity which is the difference between your assets and your liabilities. Your balance sheet must always balance – thus the name “balance sheet”. You may have seen the equation Assets = Liabilities + Equity.
One way to think about the balance sheet would be if you looked at it as of a certain period of time and acted as if you were closing your business on that specific date. What you would need to do is take all of your assets: Checking Accounts, Saving Accounts, Investments, Fixed Assets, Accounts Receivable or Inventory and use that total amount to pay off all of your liabilities: Loans, Credit Cards, Accounts Payable Or Bills and Taxes Due. If you would do this, do you have any money left over? If so, this would be your Equity amount. If you would run out of money paying off all that your business owes, you would have a negative Equity amount…or this is the amount of money you would need to put into the business to pay off the remainder of the amounts owed. This is why you never want to see a negative amount for your Equity account.
Some people will ask questions about how to properly record current or long-term assets or current or long-term liabilities. This is easily answered by asking if the lifespan of that particular item is one year or less. If it is one year or less, then that item would be considered a current asset or current liability. It just tells a little more about how quickly and how much of an amount is current.
Even though a balance sheet is a snapshot of a period of time, it is a good idea to do a comparison balance sheet. When you do this, you can compare the current balance sheet to another period of time…like lets say the prior year. When you do this, you can quickly take a look at how your assets, liabilities and equity are doing compared to the prior year at this time. You may notice that your assets have gone up, which would be great, but if you notice your liabilities or what you owe has gone up, you may want to dig a little deeper to see what is going on and how it is impacting your business.
If you are talking with a lender, you will most likely need to provide a balance sheet for them to see how your business is doing to help you secure financing. They will be looking at how much debt the business currently has and how it compares to the equity.
The most important part of your balance sheet is making sure that each of the balances listed for that particular point in time are correct. We all know it is important to reconcile our bank statements to ensure our checking and bank account balances are correct, but it is also true for all your other balance sheet accounts. You should be able to “prove” each of the amounts on your balance sheet. If you show a balance in Accounts Receivable – or customers who owe you money, you should be able to come up with a listing of all the customers who owe you money that equals the amount you have listed on your balance sheet at that point in time. If you have a loan with a bank, you should be able to get the current balance of the loan and match it with your balance sheet amount for that period of time. Make sure you are checking these numbers on a consistent basis. I recommend doing it monthly, but I understand how quickly time can slip by. You do want to make sure you are doing it at the very least at the end of the year before you bring your financial statements to your tax preparer.
If you have questions about your balance sheet, let me know. You can email me at Info@FinancialAdventure.com or join our Facebook community: Women Business Owners ~ Ultimate DIY Bookkeeping Boutique. It is so important for you to understand how your “baby” is doing, and I am here to help!
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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