We have a specific set of videos just for business owners. We will be talking about legal structure, entity selection, operations, accounting, and payroll. Today we will be talking through what small business owners need to know about the balance sheet.
What is the balance sheet? The balance sheet is essentially what you own and what you owe.
Things you own are called assets. There are different types of assets. One is called current assets which is cash, inventory, or if you are expecting payments from customers (accounts receivable). Secondly, we have fixed assets. These are things like plants, property, equipment, things that you can’t just sell quickly. This could be things like computers, machinery, or maybe vehicles.
These would be things that you owe and these are broken into two structures. First we have current liabilities so think of things like accounts payable like a credit card or a short term loan. Also we have long term loans, things that won’t be paid off within a year. These are loans or notes payable.
Owners Equity is what you put into the business. This is the money you have taken out, and then everything that is accumulated.
Now when you look at everything you own and everything you owe this is essentially a net worth statement. What is the health of my business, what do I own, what do owe, and what do I have that is left over to keep the business running?
When we are looking at the health of the business we want to be looking at how to make this better.
Some ways to look at this and make things better are to analyze it. We use a couple of ratios for this. One ratio to use is to take the current ratio: current assets divided by the current liabilities. This is our cash and accounts receivable divided by our credit cards and payroll taxes. You want that to be as low as possible. Something around 1-1.5. The higher the better you want to be able to pay off all your debt with your liquid cash.
Another ratio would be your debt ratio. Take your liabilities (total debt) and divided by total assets. You want that to be as low as possible as well. You want more assets to cover all your liabilities.
So again, the balance sheet and the net worth statement is as of a particular date and time. What is my net worth and what does the business owner owe at a certain point in time? If you understand this then you understand the health of your business. If you don’t completely understand, please reach out to us. We would be happy to set this up for you and keep it up for you going forward.
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Steve enjoys getting to know clients and hear their unique stories and the lessons learned which has brought them where they are today. One of the reasons he enjoys what he does is the ability to show the outcome that can be achieved with different choices. He also enjoys continually learning.