Accounting/ Bookkeeping: Are you a C.E.O or a business owner? Balance sheet and Assets: If youre a CEO or small business owner, you probably think of your company as your child. Because, really, youve invested time and money into it, and you birthed it. Just like a parent wants to know that their children are healthy, you similarly want to know that your business is doing well, right? (If not, then you shouldnt be a business owner. Just saying.) Today were going to talk about Balance Sheets, which you can think of as a tool to take the temperature of your business to see how its doing at any particular time. After looking at a Balance Sheet, you should have a good sense of how well your company is doing. For those of you who are just starting out as a company, this is valuable information for you to know. For those of you who are already business owners but you dont know what Im talking about, then you REALLY need to pay attention. These concepts and ideas are 100% focused on the small business owner/entrepreneur. If you own a company with a Controller, you should go ask him/her the question, How healthy is our balance sheet? If they can’t answer, give them 24 hours to figure it out. If they still don’t know the answer, you need to be looking for a new Controller because this is their job. What is a Balance Sheet? A Balance Sheet is a document that details the financial health of a business at a point in time. It does not reflect performance but rather is a one time snapshot. Investopedia provides a great summary, “A financial statement that summarizes a companys assets, liabilities and shareholders equity at a specific point in time. These three balance sheet segments give investors an idea as to what the company owns and owes, as well as the amount invested by the shareholders.” So, let’s break these three main areas down a bit: Assets Current – These are assets that have a “life-span” of 1 year or less. In other words, they can easily be converted into cash. Typical current assets are cash, accounts receivable, and inventory (that moves). Non-Current – Assets that will typically sit on the balance sheet for more than 1 year. Typically, this includes larger capital assets like machinery, equipment, or buildings. In addition, you may also have assets that are harder to value like Goodwill. Liabilities Current – Like assets, these come due within 1 year – typically accounts payable or short-term loans. Non-Current – These will sit on the balance sheet for more than 1 year. In other words, they are long-term debts Equity This represents the amount of investment shareholders put into the business. If there is a profit (net income) at the end of the year and it is kept in the business, this number is reflected in the equity section under retained earnings. Who should pay attention to a balance sheet? The Balance Sheet is an extremely important financial document; however, for many businesses, it really doesn’t matter all that much. Here are the characteristics of a company that should pay close attention to their balance sheet. Lots of capital equipment – manufacturing, etc. Lots of inventory – distribution or manufacturing Lots of debt – companies that use debt to finance purchases that don’t show up on the income statement – typically capital equipment and inventory. If you don’t have these characteristics and your customers typically pay on time (within 45 days), then your Balance Sheet is really not much more than a checking account balance. How healthy is my balance sheet? There are a variety of ways to tell the health of your Balance Sheet. I recommend that every small business owner should pay attention to the following: Current Ratio – Let’s you know if you have enough cash and short term assets to pay your short term bills. I recommend yours is 1.5 or higher Current Ratio = Current Assets/Current Liabilities Quick ratio – Similar to current but it takes out inventory because many times it’s difficult (if not impossible) to turn inventory into cash. Quick Ratio = (Current Assets – Inventory)/Current Liabilities Have more questions about Balance Sheets? Give me a call, and Ill walk through this stuff with you.
Posted on: Fri, 07 Nov 2014 01:03:01 +0000
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