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A balance sheet prepares you for wisely choosing your next moves. How?
The direction you take and the initiatives you implement are highly dependent on what’s happened in the recent past, and that information is rooted in the balance sheet of your business.
Effectively, a balance sheet represents the overall status of your business and presents warning signs that don’t appear on a profit & loss (P&L) statement, which is more a statement of revenue and expenses.
Lenders are keenly aware of the value of a borrower’s balance sheet, and will scrutinize it to uncover the real picture of the business.
Balance sheets are snapshots of account balances on given dates, such as month-end or year-end. The three sections are: (1) what you own (assets), (2) what you owe (liabilities), and (3) the difference between these two—which is your business net worth (equity). Let’s have a quick review:
- Current Assets—cash or assets easily converted to cash, such as accounts receivable and inventory. These also include employee advances and similar short-term amounts. Each current asset account should reconcile to a financial institution statement or other corroborating record.
- Fixed Assets—equipment, furniture, computers, leasehold improvements, etc., that have a useful life beyond one year and more than nominal cost.
- Current Liabilities—accounts payable, payroll taxes accrued but not yet remitted, credit card balances, and sales tax collected but not yet paid are examples of current liabilities. Usually such accounts are payable in less than a year.
- Long-term liabilities—loans payable in more than a year. Each account balance should match other records—payroll reports, credit card statements, or lender summaries.
- Types of equity accounts depend on whether the business is a corporation, partnership, or proprietorship.
- The most common reason for unequal asset and liability balances is the accumulation of business profits, which appear in the retained earnings equity account. Current year profit is separately indicated, and matches the bottom line of the P&L.
- Other equity sources are capital from shareholders, partners, or an owner.
What you learn could make all the difference in the success of your company!