To drive your business from a financially savvy perspective, it is imperative that you have an understanding of your financial reports. The Balance Sheet is often overlooked by small business owners because they don’t really get what the purpose of it is. Here are some insights on helping you to demystify your balance sheet.

Assets are what the business owner has and/or owns.

Current assets – Amounts that will be converted into cash within the next 12 months. In QuickBooks you will utilize the following asset account types:

BANK = cash is money that the business has on hand and/or in the bank.

ACCOUNTS RECEIVABLE = the amount of month customers owe the business for goods or services.

CURRENT ASSETS = inventory and other current assets

FIXED ASSETS = items purchased to operate the business such as buildings, equipment, land, etc. These items are expected to last more than a year and are often depreciated out. That is to say, over the life of the asset the cost to purchase the item is deducted as an expense termed depreciation. It is best to consult with your account on the proper way to classify your fixed assets.

OTHER ASSETS = loans receivable from officers of the company, lease deposits on property, etc.

Liabilities are what the business owes. Liability account types include:

ACCOUNTS PAYABLE = what is unpaid to vendors for goods and/or services

CURRENT LIABILITIES = items that can be paid off in a 12 month period. Some examples of these types of liabilities are tax liabilities, client deposits, credit card balances, etc.

LONG TERM LIABILITIES = the portion of the debt that cannot be paid off within a 12 month period.

It is a good idea to consult with your accountant for advice on the proper classification of liabilities as to whether they should be current or long term.

Now that you know what the various parts of the Balance Sheet are. Why is it important? It shows you the position of your business at a specific point in time. How much do you own compared to how much you owe? It is showing you how the business is growing its value (ie equity). It provides you a different perspective about business health. That’s why you provide it to your banker and to your tax preparer, as well as why you as the business owner should review it monthly.

Growing a business isn’t just about the profitability and cash flow, it’s also about measuring the assets and debt you are acquiring. You have to be able to ensure your growth in the right ways. There are a variety of ways to analyze your business, including ROA (Return on Assets) which indicates how are the purchases of assets helping to bring money into the business? The only reason you should purchase an asset is that it is going to help bring revenue in your door, either directly or indirectly. You also use the Balance Sheet information to analyze your inventory turnover. Inventory that just sits on your shelves and never sells is not a good investment and consumes your cash. Your inventory should be turning over frequently to provide sales to the business. How often? It depends on the type of industry you are in. Check your industry information for specific targets on Inventory Turnover Ratios.

Take time to understand your Balance Sheet, it will bring you great insight as a business owner.

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