Up and to the Right | 2016 Week 47 | Balance Sheet Basics

Balance Sheet Basics

How often do you review the three standard accounting reports for your business. Accounting gets a bad rap but the reports that they generate are the first place to go to find measured results that you can use to improve your business. The Balance Sheet, Income Statement and Statement of Cash Flows can be a wealth of information and a great place to start looking for ways to improve as well as a great mechanism to monitor the results of changes you make.

Worksheet

The Financial Statement Worksheet will be included in the show notes for Episode 2016 Week 50 when we talk about ratios.

Tool of the Trade

Quickbooks Online

Xero

Wave

Sage

Less Accounting

Reading Room

The $100 Startup: Reinvent the Way You Make a Living, Do What You Love, and Create a New Future - Napoleon Hill (Audible Version) and the dead tree version here.

How often do you review the three standard accounting reports for your business. Accounting gets a bad rap but the reports that they generate are the first place to go to find measured results that you can use to improve your business. The Balance Sheet, Income Statement and Statement of Cash Flows can be a wealth of information and a great place to start looking for ways to improve as well as a great mechanism to monitor the results of changes you make.

Why should you review your Balance Sheet?

• Get real (aka objective) insights into the performance and strength of your business.
• What gets measured gets managed. (Concept made popular by Peter Drucker)

Breaking Down the Balance Sheet

Assets

Assets are simply what the company owns. We break these down into the following two categories:

Current - This consists of items that are either cash or are expected to be converted to cash within one year.

• Cash
• Accounts Receivable
• Inventory

Fixed - Expensive items that are expected to be used in the business for a number of years.

• Vehicles
• Machinery
• High Performance Computer Workstations

Liabilities

We use the term 'liability' to refer to what the company owes to outside organizations.

Short Term - similar to our Current Assets, our Short Term Liabilities are debts that we expect to pay within one year.

• Accounts Payable - the bills we have to pay from vendors for services or items used or resold by our business.
• Credit Card or other short term debt

Long Term - debts that are expected to be paid off over more than one year.

• Business Loans (startup or expansion loans)
• Automobile Loans

Equity

Equity is found by taking the Total Assets and subtracting Total Liabilities. By doing this we find that the Total Assets of a business are in balance with the sum of the Total Liabilities and Equity... and thus the name "Balance Sheet".

Ack! I missed discussing most of these during the podcast after skipping some of my notes! Sorry about that - fear not they are listed below.

The Key Elements

The following elements of the Balance Sheet should be reviewed regularly.

Cash - it may seem pretty obvious but it's important to monitor your cash regularly.

• Be sure you have a reserve amount of cash to provide a cushion during difficult times or cyclical sales periods.
• Maintain sufficient operation cash to ensure you can pay your vendors, operating expenses and employees on time.

Accounts Receivable - it's important, if you're extending credit to customers, that you are getting paid on time.

Inventory - in order to have inventory on hand you have to use cash which reduces your available cash. Watch inventory value for trends that might suggest you are tying up too much of your cash.

Short Term Liabilities - watch these to make sure that your balances are not increasing beyond the strength of your cash flow (combine this with information from the Income Statement and Statement of Cash Flows).

Long Term Liabilities - again we need to watch these values to ensure that our cash flow can cover the payments required.

Equity - over time the Equity in your company should be increasing as net income (profit) adds to the amount you originally started your company with.