What Can a Balance Sheet Reveal About Your Business?
Jul 04, 2024Today, we’re diving into a financial statement that holds immense power for understanding the health of your business—the balance sheet.
When you start as an entrepreneur, most advice centers around knowing your profitability. You’re taught to keep an eye on your sales, costs, and profit and loss statement (P&L). This is your business's metabolism—calories in, calories out. Tracking these numbers answers the most pressing questions in your early stages: Are you making money? Is your business generating income? However, there’s another equally important financial document that often gets overlooked—the balance sheet.
Think of your P&L statement as an automatic car—it’s straightforward and easy to understand. On the other hand, the balance sheet is like a stick shift; it requires a bit more training to navigate but offers a more controlled and insightful driving experience. Your balance sheet is a financial health snapshot of your business—it tells you how stable your business is at any given point in time.
The balance sheet tells you about three key financial metrics: assets, liabilities, and equity. Assets are what your business owns and can help generate more money—bank accounts, inventory, receivables, vehicles, property, and equipment. Liabilities are what your business owes—debts such as loans, credit card balances, payroll taxes, and other accruing expenses. Equity is what you truly own in your business—assets minus liabilities. This can fluctuate based on various factors like profits retained in the business or distributions (money taken out for personal use).
Once you understand what assets, liabilities, and equity represent, your balance sheet can reveal crucial information about your business, such as solvency. Solvency means your assets exceed your liabilities. If they do, you’re solvent, meaning you have positive equity and are not overly reliant on debt. It indicates that your business can cover its obligations. It also shows how much of your business is financed by debt and helps you assess whether your inventory is properly tracked and whether your receivables are manageable.
Many businesses fail because they ignore their balance sheets. Positive profits can be misleading if you’re simultaneously taking out more in distributions or relying too heavily on loans. This is akin to losing weight through diet pills—unsustainable and risky.
When you receive your financial statements from your bookkeeper, don’t let them gather dust. Engage with your professional: ask your bookkeeper or accountant to walk you through the balance sheet. They can provide narrative explanations that make the data actionable. If you’re managing your own books, consider using services like CFO on Demand. For under $100 a month, you’ll get a 20-minute one-on-one with me or my team, where we’ll help you decode your financial statements. Make it a routine to review your balance sheet periodically. This proactive approach ensures you catch any potential financial issues early.
The balance sheet is more than just a financial statement; it’s a window into the financial health and sustainability of your business. By keeping an eye on it, you can make more informed decisions, ensuring you're not just focusing on profits, but also on maintaining a stable, solvent business.
What you'll hear in this episode:
04:03 Snapshot of financial health: assets, liabilities, equity.
08:49 Manage inventory, receivables, and financial health carefully.
10:18 Assess business health beyond profit and loss.
If you like this episode, check out:
What Should You Track in Your Books?
Why Should You Separate Your Business Money from Personal Finances?
Want to learn more so you can earn more?
CFO On Demand click here
Visit keepwhatyouearn.com to dive deeper on our episodes
Visit keepwhatyouearncfo.com to work with Shannon and her team
Watch this episode and more here: https://www.youtube.com/channel/UCMlIuZsrllp1Uc_MlhriLvQ
Connect with Shannon on IG: https://www.instagram.com/shannonkweinstein/
The information contained in this podcast is intended for educational purposes only and is not individual tax advice. Please consult a qualified professional before implementing anything you learn.
