Understanding 5 things your balance sheet would tell you if it could talk about your business is important for your success.
You don’t have to be an accountant or super great with numbers to create one. If you have accounting software, it’s prepared and updated automatically as you enter your daily information. It just doesn’t get any better than that!
#1. Hi, I’m your Balance Sheet.
In the world of bookkeeping and accounting there are two funny little formulas that both mean the same thing:
Assets MINUS Liabilities EQUALS Owner’s Equity
Liabilities PLUS Owner’s Equity EQUALS Assets
For example, let’s say you started your handmade or creative biz by taking $500.00 out of the family budget and depositing that money into a checking account you set up for your biz. You have no liabilities (money that you owe others).
Either way you slice that example your biz has $500 in assets and you have $500 in owner’s equity.
It’s not uncommon for a business to look at or prepare one every month, most certainly one per quarter, and another at the end of the year.
#2. You Balance Sheet can introduce you to your debt ratio
Say WHAT??? Debt ratio???
Your balance sheet gives you a peek under the hood about how your company is doing financially.
Another of the 5 things your balance sheet can tell you about your debt ratio – which is a ratio that is derived by comparing your total debts to your total assets.
Divide total liabilities by total assets to get your percentage.
($100 in assets and $55 in debt = 55%)
So, if your assets can cover debts, that’s awesome!
#3. What’s your Owner’s Equity?
Owner’s equity is basically what would be left over for YOU from business assets after paying off all the liabilities.
For sole proprietors (and single member LLC’s), equity is your contributions of cash and property into your business MINUS any withdrawals or money you take out of your business.
One of the things you can do, is compare your owner’s equity from one month or quarter to the next. This lets you know how your investment is doing.
If your equity is increasing – THAT’S AWESOME!!!!! But if it’s shrinking, you need to do a major review and figure out what the heck is going on. It might be as simple as paying off your debts which reduces your liabilities.
#4. So, who looks at the balance sheet?
Well, it should be YOU that looks at your numbers EVERY.SINGLE.MONTH.
But, other than you – if you go for a business loan, the lender will look at BOTH your balance sheet and your Profit & Loss Report.
5. The balance sheet and your taxes
As a sole proprietor or a single member LLC, you DON’T HAVE TO prepare a balance sheet. BUT, I highly recommend that you do. There are things that YOU need to look at, like the balance you have in your checking account, how much money you have tied up in Inventory, how much money people owe you, how much money you owe people – including your Sales Tax, AND how much money you’ve put into (or taken out of) your business.
Until next time, Happy Creativity!