Imagine trying to assemble a complex puzzle in the dark. You might be able to connect a few pieces, but without seeing the whole picture, you're likely to make mistakes and end up not achieving your goal. A balance sheet is like turning on the light, allowing you to see all the pieces and how they fit together. With a clear view, you can strategically assemble the puzzle and create a complete picture of your financial health.
What is a balance sheet?
A balance sheet is a financial snapshot of your business at a specific point in time. It shows your assets (what you own), liabilities (what you owe), and equity (the difference between the two).
Why is it important?
A balance sheet is like a financial snapshot of your small business, giving you a clear picture of its financial health. It shows you what you own (assets), what you owe (liabilities), and the value of your business (equity).
This information is crucial for making informed decisions about your business, such as investing in new equipment, taking on debt, or expanding your services. For example, a mental health practice could use a balance sheet to determine whether it has enough funds to hire another therapist or open an additional location.
Lenders and investors rely on balance sheets to assess your business's financial stability and creditworthiness. By regularly reviewing your balance sheet, you can track your progress, identify areas for improvement, and ensure the long-term success of your business.
Pro tip: Set a goal for writing down all your assets and liabilities. Getting them on paper is the first step to having a clear picture of your business's profitability.
How often do you review your balance sheet?
I do not have one
Once a month
Once a quarter
Once a year
How can you use it to make decisions?
Identify and manage assets: A balance sheet helps you understand the value of your assets and make informed decisions about buying, selling, or utilizing them effectively. If your business is struggling with cash flow, selling underutilized assets might be a good way to generate some cash.
Monitor and control liabilities: By tracking your liabilities, you can manage your debt levels and make strategic decisions about repayment. Debt can be a good thing if it is fueling your growth. Developing a strategy around leveraging debt to grow revenue is critical to a successful business strategy.
Assess your equity position: Your equity position reflects the overall value of your business. Monitoring it helps you understand your financial stability and growth potential. Your equity goals will vary based on your growth stage. Newer companies tend to have lower equity as they invest in growth. As your company matures, you will want to see your equity grow. The balance sheet will allow you to monitor progress over time.
Pro Tip: Review the interest rates on your current liabilities. Which borrowing sources carry the highest interest? Eliminating these liabilities will help you reduce your debt burden and improve your business's profitability.
How do I Build A Balance Sheet?
Building a balance sheet for your small business involves a few key steps.
Start by listing all your assets, which include everything your business owns, such as cash, inventory, equipment, and accounts receivable.
Next, list your liabilities, which are all your business's debts and obligations, such as loans, accounts payable, and any other outstanding debts.
Finally, calculate your equity by subtracting your total liabilities from your total assets. This will give you a clear picture of your business's financial health.
Regularly updating your balance sheet helps you track financial progress, make informed decisions, and ensure long-term success. If you need assistance, consider consulting with a financial advisor or accountant to ensure accuracy and completeness. Accounting software like Quickbooks can make it easy to build a balance sheet.
Don't leave your business in the dark.
Take the time to create and regularly review your balance sheet. It may seem daunting initially, but the insights you gain are invaluable. Like turning on the light to solve a puzzle, investing time in your balance sheet will give you the clarity and control to navigate your business toward success.
Need help?
If you're struggling to create or interpret your balance sheet or simply looking for a thought partner to guide you, Your Path Coaching and Consulting is here to help. We can assist you in building the financial acumen and routines necessary to improve your business's profitability.
Schedule a free consultation today to discuss how we can help you achieve your goals.
Remember: A balance sheet is not just a financial statement; it's a roadmap to your business's success.
Thanks for reading our latest installment of Your Path to Business Success. This series is designed to help business owners have their best year yet. If this is your first time reading, check out the other blogs in this series. Each touches on a different topic of business acumen. Knowledge is key to growth. We are here to help you gain the knowledge, skills, experience, and network needed to achieve your professional goals. If you have any questions about anything covered here, email executive coach Dorian Cunion at dcunion@yourpathexecutivesolutions.com
Looking for Additional Resources
Reach out to the experts from our network.
CPAs
Lisa Moody, Discover the Factor https://www.discoverfactor.com/
BJ Lanier, Nova Accounting bj@novaaccounting.com
Bookkeepers
Ashley Cloude, Cloude Accounting, ashley.cloude@gmail.com
Sabrina Trimiew, MarBey Accounting, sabrina@marbrey.co
Zach Broaddus, Profit Map, http://broaddus.biz/
Carina Epps, Everlife Accounting Group
Fractional CFO
Scott Geller, PathPredict http://www.capitisadvisors.com/
Carina Epps, Everlife Accounting Group CFO Services
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